Premier Financial Corp (OHIO) (PFC) 2010 Q4 法說會逐字稿

Good morning and welcome to the First Defiance fourth-quarter and full-year 2010 conference call. All participants will be in listen-only mode. (Operator Instructions)

After today's presentation, there will be an opportunity to ask questions. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Mary Beth Weisenburger with First Defiance Financial Corporation. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for today's fourth-quarter and full-year 2010 conference call.

This call is also being webcast and the audio replay will be available at the First Defiance website at FDEF.com. Providing commentary this morning will be Bill Small, Chairman, President and CEO of First Defiance; and Don Hileman, Executive Vice President and Chief Financial Officer. Following their prepared comments on the Company's strategy and performance, they will be available to take your questions.

Before we begin, I'd like to remind you that during the conference call today, including during the question and answer period, you may hear forward-looking statements related to future financial results and business operations for First Defiance Financial Corp. Actual results may differ materially from current management forecasts and projections as a result of factors over which the Company has no control.

Information on these risk factors and additional information on forward-looking statements are included in the news release and in the Company's reports on file with the Securities and Exchange Commission. And now, I'll turn the call over to Mr. Small for his comments.

Thank you, Mary Beth. Good morning and thank you for joining us for the First Defiance Financial Corp. conference call to review the 2010 fourth-quarter and year-end result.

Last night we issued our 2010 earnings release and this morning we would like to discuss that release and give you a look forward into 2011. At the conclusion of our presentation, we will answer any questions you might have.

Joining me on the call this morning to give more detail on the financial performance for the fourth quarter and the year is CFO Don Hileman. Also with us this morning to answer questions is Jim Rohrs, President and CEO of First Federal Bank.

Fourth-quarter 2010 net income on a GAAP basis was $2.3 million or $0.22 per diluted common share compared to $555,000 and $0.01 per diluted common share in the 2009 fourth quarter. For the year ended December 31, 2010 First Defiance earned $8.1 million or $0.75 per diluted common share compared to $7.2 million or $0.63 per diluted common share for 2009.

As 2010 came to an end, we continued to face many challenges in the banking industry. We are still dealing with historically high unemployment levels and a housing sector that has not found its footing.

Some economic indicators are pointing toward a sustainable recovery but job growth continues to lag and foreclosures on homes remain high. Throughout the year, high provision expense and additional expenses associated with collections and other real estate owned relating to these issues had a negative impact on earnings.

However even in this environment, we have confidence in our core operation and our fundamental operating metrics were again very solid. I'm pleased to report that despite the continuing challenges in this operating environment, the Company remained profitable for the quarter and the full year 2010.

Beyond our normal business activities during the year, the Company successfully converted its core operating systems in the fourth quarter with no significant service interruptions or client impact. The core conversion project consumed significant resources in both capital and staff terms.

The reach of this project was expensive and it took many months to unfold. I'm proud of the conversion team and their efforts as they consistently placed client needs first and worked to mitigate any negative effects.

From an overall performance viewpoint, net income was flat with the linked quarter but was up significantly over fourth-quarter 2009. Full-year results for 2010 were also up over 2009 results.

Net interest margin performance throughout the year, increased mortgage production in the second half of 2010 as well improved performance in both our wealth management and insurance business all helps to offset the credit related expenses and the cost related to the core conversion. Asset quality performance in the fourth quarter was again considerably weaker than our historic standards. While provision expense in the fourth quarter 2010 was down significantly from the 2009 fourth quarter, the total provision for 2010 was at the same level as 2009.

In light of the continued environment of high unemployment as well as the overall uncertainty of the commercial real estate market, we believe it is prudent to maintain reserves at this level. This decision drove the provision expense throughout the year, bringing our ratio of allowance to loan loss to total loans up to 2.7%.

We had a sizable increase in charge-offs during the fourth quarter as we were more aggressive in writing down collateral values and disposing of OREO. We did have a slight improvement in the fourth quarter over the linked quarter in our level of nonperforming assets.

We continued to devote significant resources to the monitoring and early recognition of any weaknesses in the portfolio. While we're not seeing new specific loan problems arise in the portfolio, we are focused on the overall economic environment in which we are operating. We believe the overall reserve build was appropriate based on the still tentative condition of the economy.

In line with the prudent decision to maintain the loan reserve and preserve capital at the bank, the Board of Directors has continued to defer on paying a common dividend. We believe that the fundamentals of the Company remain sound, but it will take some time to work through the problem credits and allow the economy to show sustained improvement. As we get the troubled assets worked through the system and the economy stabilizes, we would expect to return to levels of profitability more consistent with the past.

There were many encouraging indicators in our fourth-quarter performance. One of the significant positive stories in the quarter was the net interest margin remained relatively strong at 3.89%, producing another solid quarter of net interest income performance.

We have a disciplined pricing strategy that resulted in the stable net interest margin for the quarter and we will continue to focus on managing the margin and adjusting our pricing strategy as changes in the market warrant. Non-interest income in the 2010 fourth quarter was flat compared to the linked quarter but up over the 2009 fourth quarter and up about 5% for all of 2010 compared to 2009.

Mortgage banking income while down significantly for the full year was a major contributor to non-interest income in the fourth quarter of 2010. Mortgage originations were strong throughout the second half of 2010 as the low interest rates drove another round of refinancing. However, activity did begin to slow during December as rates started to rise.

Income from our insurance and wealth management areas was also up compared to 2009 fourth quarter and year-end results. The acquisition of the additional group benefits book of business in May of 2010 continues to add to our insurance agency performance. Our trust and investment lines within wealth management continued to grow their business relationship leading to record performance in those areas.

Total non-interest expense was up for the December 31, 2010 over the fourth quarter of 2009. The fourth quarter of 2010 included a large portion of the expenses related to our core system conversion.

Other increases included compensation, deposit insurance premiums, and deferred compensation expense. These were partially offset with reductions in marketing and other non-interest expense.

Total loan balances at December 31, 2010 were down 6% from year-end 2009. Commercial loan demand overall remains flat as businesses remain cautious about making new capital investments, but we are seeing signs of renewed optimism as the economy looks to be stabilizing and consumer demand is picking up. However, we remain guarded in this environment as we review credit requests.

Total deposit balances at year-end were basically unchanged from year-end 2009, but the mix made a very favorable change throughout the year. We continue to have success growing our non-interest bearing deposits and this strategy has had a positive impact on net interest margin.

Our asset liability committee is very focused on managing the spread between loans and deposits, but there is little room left to lower deposit rates which requires us to be even more disciplined on the lending side and further emphasizes the need to focus on non-interest-bearing deposits.

I will now ask Don Hileman to give you additional financial details for the quarter and the 2010 year-end before I wrap up with an overview and a look at what we see developing for 2011. Don?

Thank you, Bill, and good morning, everyone. The fourth quarter saw improved profitability with continued strong mortgage banking income driving non-interest income as well as higher net interest income.

The Company successfully converted its core systems in the fourth quarter with no significant service interruptions. We have been preparing for this for well over a year and look forward to the added efficiency and features the new system will contribute to our operation. Also in the fourth quarter, the annual regulatory safety and soundness exam was completed.

Credit quality continues to meaningfully impact earnings with higher levels of provision for loan loss. Credit and collection costs have moderated from the fourth quarter of last year and on a linked quarter basis but still remain significant. Our markets are [persistently] showing the effects of a difficult economic environment.

While we're seeing some moderation and reduction in unemployment in our market area, it continues to have a major impact on most of our counties we serve. We are slightly optimistic that the overall trend is indicating improved economic activity, however, it will be irregular and take time to solidly develop with an extended ramp-up period well into 2011.

As we review our financial performance, overall credit remains a major factor and impacted our performance. However, we also had several areas of strength such as mortgage banking and the stability of our net interest income. I will begin with a discussion of credit quality.

Our provision expense totaled $5.7 million, down from $8.5 million a year ago and up slightly on a linked quarter basis. Our allowance for loan losses increased to $41.1 million or 2.7% of total loans from $36.5 million or 2.26% at December 31, 2009. The reserve remained basically flat on a linked quarter basis.

The fourth-quarter provision was $263,000 less than the net charge-offs for the quarter. The overall reserve level is consistent with our anticipation of prior near-term charge-offs.

Annualized net charge-offs were 158 basis points for the fourth quarter of 2010 compared with 79 basis points in the fourth quarter of 2009 and 70 basis points in the third quarter of 2010. Of the total charge-offs, 79% related to commercial real estate, 8% to residential, 7% to home equity and consumer loans and 6% to commercial loans. Of the total commercial real estate charge-offs, 51% or $2.5 million was due to one credit relationship.

While encouraged by the slight -- recent slight reductions in unemployment rates in our market, the continued uncertainty in the overall economy and specifically lower real estate values and economic weakness as well as the current regulatory environment make us cautious as to the timing of economic recovery. As we see improvements in our asset quality trends as well as in the economy, we will be more confident as to the future direction of asset quality.

We maintain a continuous process of analysis and review of our loan portfolio. As loans move through the credit resolution process, one of the alternatives is for the bank to take control of the real estate collateral either by way of foreclosure or by obtaining title voluntarily from the borrower in lieu of foreclosure.

Our OREO balance declined on a linked quarter basis ended the fourth quarter at $9.6 million. The OREO balance is made up of $7.8 million of commercial real estate and $1.8 million of residential real estate.

We had additions of $2.1 million in the fourth quarter of 2010 offset by sales of $2.6 million and valuation adjustments of $1 million. We continue to be active in seeking potential buyers of these properties to encourage more sales opportunities as they go to auction or are listed for sale with the expectation of lower values as the market inventory of these type of properties continues to increase.

At December 31, our allowance for loan losses represented 2.7% of total loans outstanding, up from 2.67% on a linked quarter basis and represents 87.21% of our non-performing loans, which is up from 76.29% of non-performing loans at December 31, 2009. The allowance of non-performing assets was 72% at December 31, 2010 up from 59.5% at December 31, 2009.

Non-performing assets ended the quarter at $56.7 million or 2.78% of total assets down from 2.8% on a linked quarter basis and down from 2.99% at December 31, 2009. Total non-performing loans decreased to $47.1 million or $47.9 million at December 31, 2009. In the fourth quarter non-accrual loans increased $3.6 million primarily due to one large credit relationship to $41 million and $37.4 million on a linked quarter basis.

Restructured loans decreased $2.7 million from last quarter. Restructured loans are considered non-performing because of the changes in the original terms granted to borrowers. It is important to note that these loans are still accruing. This is a process in which we can work with borrowers who have the ability to repay to mitigate loss potential.

Total classified loans increased $4.9 million to $133.1 million at December 31, 2010 from $128.0 million at December 31, 2009 and from $127.6 million at September 30, 2010. While disappointed in the increase, we believe we have provided for any potential loss.

Total delinquency rate was 3.4% at December 31, 2010 up from 3.18% at December 31, 2009 and up from 2.9% on a linked quarter basis. The delinquency rate for the loans 90 days past due (inaudible) non-accrual increased to 2.68% this quarter up from 2.4% in the third quarter of 2010 and was up from 2.5% at December 31, 2009.

We were not satisfied with the overall levels of delinquency, however, we did note a reduction in the commercial real estate 90-day non-accrual date moving from 3.01 last quarter to 2.84% this quarter. Of the total non-accrual loans of $41 million, $15.5 million are under 90 days past due.

We believe we have a diversified portfolio and a low average loan size with minimal presence in the most problematic segments of commercial real estate such as big-box retailers and large office buildings. And credits are generally underwritten on a cash flow basis and require meaningful equity and personal guarantees.

We continue to strengthen our credit review process and increase the overall scope of loans we individually view on a quarterly basis. Improving credit quality and reducing the level of non-performing assets and classified assets is a major focus of the Company.

Mortgage banking was up in the fourth quarter driven by strong refinance activity in this low rate environment. We've seen a tapering off of applications over the last several months.

Overall mortgage banking income for the quarter was $2.7 million compared to $2.1 million in the fourth quarter of 2009 and $2.3 million on a linked quarter basis. We had a gain on sale of income of $1.8 million in the fourth quarter of 2010 compared with $1.5 million in the fourth quarter of 2009 and $2.8 million in the third quarter of 2010.

We also recorded a positive valuation adjustment to mortgage servicing rights of $1.1 million in the fourth quarter of 2010 compared with positive valuation adjustments of $397,000 in the fourth quarter of 2009 and a negative valuation adjustment of $527,000 on a linked quarter basis. The positive valuation adjustment in the fourth quarter reflects the change in the level of market interest rates that affect the assumed prepayment speeds on the underlying collateral.

At December 31, 2010, First Defiance had $1.3 billion of loan service for others. The mortgage servicing rights associated with those loans had a fair value of $9.5 million or 75 basis points of the outstanding loan balance of service. Total impairment reserves which are available [for cash] in future periods totaled $1.1 million at the end of the quarter.

The fourth quarter was the first period in which we did not regard charges for other than temporary impairment. In the fourth quarter of 2009, we recorded a charge of $1.4 million for other than temporary impairment.

This fact reflects a more stabile economic environment as it relates to our investments in trust preferred collateralized debt obligations. The trust preferred CDOs investment in the portfolio have a total book value of $3.8 million and market values of $1.5 million at December 31, 2010.

The book value of the CDOs with OTTI at December 31, 2010 was $1.8 million with a market value of $502,000. The book value of CDOs without credit impairment was $2 million with a market value of $995,000.

The aggregate decline in the value of those investments was primarily due to lack of liquidity in the CDO market and the still uncertain operating environment for financial institutions. These investments continue to pay principal interest in accordance with the contractual terms of the securities.

(inaudible) has not deemed the impairment in value of these securities be other than temporary and therefore does not recognize the reduction of those investments and earnings. Turning to our other operating results, our net interest income was $17.8 million for the quarter compared to $17.8 million on a linked quarter basis and up from $17.5 million in the fourth quarter of 2009.

For the quarter, our margin was 3.89% which was a 7 basis point increase from the fourth quarter 2009 and a 5 basis point decrease on a linked quarter basis. We've been successfully lowering of our cost of funds but as this quarter indicated, not enough to offset the decline in asset yields.

We have seen more aggressive comparative pricing pressure and the downward repricing of variable rate loans based on the current yield curve. The increase on our liquidity position has also impacted the margin as we have seen an increase in overnight deposits, although we believe our liquidity position continues to be important, gives us the added flexibility and overall liability pricing.

We have been able to shift the asset mix somewhat this quarter from cash in the intermediate-term securities and will continue to look for investment opportunities on the short to intermediate end of the yield curve. We have placed a strong emphasis on non-interest-bearing deposit accounts and saw the balances grow this quarter.

We are focused on pricing opportunities to maintain and expand the margin. We are particularly focused on asset pricing discipline and the challenges of maintaining asset yields.

The cost of funds declined 18 basis points on a linked quarter basis with the yield on assets declining 22 basis points. Fee income declined to $2.9 million in the fourth quarter of 2010 from $3.3 million on a linked quarter basis compared with $3.5 million in the fourth quarter of 2009.

Insurance revenue was $1.3 million in the fourth quarter of 2010, down slightly from $1.4 million on a linked quarter basis and up from $1.1 million in the fourth quarter of 2009. Year over year insurance revenue increase primarily driven by the acquisition of the group benefits group in the second quarter of 2010.

Overall non-interest expense increased to $16.5 million this quarter compared with $14.6 million in the fourth quarter of 2009 and declined from $17.1 million on a linked quarter basis. The fourth quarter compensation of benefits expenses increased to $7.2 million from $7.1 million on a linked quarter basis and from $6.4 million in the fourth quarter of 2009.

Our compensation and benefits expenses increased $128,000 on a linked quarter basis and $845,000 over the fourth quarter of 2009. The majority of the increase over the fourth quarter of 2009 relates to variable performance-based compensation.

Our total FTE level has been consistently around 500 employees throughout the year. We believe we are close to the optimal staffing level necessary to maintain our quality customer service culture our customers desire expect from First Defiance. FDIC insurance expense increased $248,000 in the fourth quarter of 2010 compared with the fourth quarter of 2009.

Other non-interest expense increased to $4.4 million in the fourth quarter from $3.7 million in the fourth quarter of 2009 and declined from $5.3 million on a linked quarter basis. Increases in expenses over the prior year of $802,000 for core conversion costs, $162,000 change in deferred compensation valuation [are adding] $56,000 in examination fees of $118,000.

The fourth quarter of 2009 other non-interest expenses had a credit of $175,000 related to the the recovery of fraud losses. On a linked quarter, other non-interest expense declined $866,000 primarily due to decreases in credit collection costs of $1.9 million.

Included in the credit and collection costs was a decrease of $1 million in OREO write-downs. We believe that we have a balanced approach to cost control in this difficult environment as well as sustained focus on customer service and customer acquisition.

We continue to look for opportunities to expand our market presence in strategic growth markets. You saw the balance sheet contract in the fourth quarter with total assets shrinking by $21 million from December 2009 to $2.04 billion at December 31, 2010.

On the asset side, cash and equivalents grew $48 million over the year to $169.2 million at December 31, 2010. Securities grew $26.7 million over the year to $166 million. Gross loan balances declined $98 million year over year and declined $34 million on a linked quarter basis.

Loan activity in general continues to be weak, but we are seeing some signs of increased commercial loan activity. We continue to be prudent in our new loan activities.

We have been disciplined in underwriting and we have not focused on growth at the expense of taking on greater credit risk or lowered rates to increase loan volume. We have been intent on making sure our service levels have not suffered as a result of the increased level of loan workouts. We have been able to develop strong new relationships with good commercial clients.

Our total deposits declined $5 million from December of 2009 and declined $15 million on a linked quarter basis as we allowed higher price of CDs to run off. However, we are pleased with the mix of deposits since we have seen a growth in non-interest-bearing account balances.

Non-interest-bearing deposits increased to $217 million at December 31, 2010 up from $189 million at December 31, 2009. We continue to focus on growth in non-interest-bearing balances in correlation with an overall strategy and efforts to reduce cost of funds in this interest rate environment.

Our capital position remains strong with shareholders equity (inaudible) at December 31, 2010 from 11.4% at December 31, 2009. Our risk-based capital ratio is strong at approximately 14%. That completes my review of the quarter and I'll turn the call back to you, Bill.

Thank you, Don. As we move forward into 2011, we will continue to address the challenges that face the entire banking industry.

We do feel more optimistic entering this year even as the overall economic climate throughout our market area varies from industry to industry. We do see signs of improvement in manufacturing and other sectors that are certainly encouraging.

Business inventories have been significantly reduced and the consumer seems to be gaining confidence. This bodes well for our commercial customers that have weathered the storm to this point and are now seeing some relief to cash flow pressures.

Unemployment numbers are still running higher in this region compared to national numbers, but there have been a few instances of callbacks and even some new hires. While this is encouraging, we feel that most companies remain slow to recall their workers until they develop more confidence in the strength and sustainability of the recovery.

The elevated unemployment levels will further strain consumers in meeting their debt obligations. Our credit staff continues to work at identifying any weaknesses early in order to mitigate potential losses.

On the commercial lending side, asset review functions and delinquent loan reporting requirements continue to be maintained in monitoring the portfolio. We review credit concentrations by industry and have placed lower limits on lending within certain types of loan categories.

We have further segmented our commercial real estate portfolio to track the general performance of these segments and better analyze potential problems earlier. We also coordinate calls between our lenders and our insurance agents to develop total financial relationships within our customers.

Our forecast shows modest loan growth in 2011. Housing is the one area that will continue to be a drag on the recovery.

In this area, we feel that home prices have at least stabilized but are well below levels of four or five years ago. Foreclosures continue to run above normal levels and can be expected to stay on that pace for a good portion of the year, adding to the inventory of homes on the market.

Mortgage loan growth as I said earlier is expected to be lower in 2011 as interest rates have come off their lows, removing the main incentive to refinance. Mortgage rates still remain at historically low levels and this will hopefully facilitate an increase in purchase money borrowing.

Deposit rates remain low as banks have felt no pressure to increase rates while businesses and consumers continue to build their deposit balances. The Federal Reserve's [quantitative easing] program also is at work to keep rates from rising in hopes of spurring on the recovery. Deposit growth should remain steady at least through the first half of the year unless the Fed decides to move rates sooner than currently anticipated.

Based on current rate forecasts, we expect the net interest margin to stay relatively flat in early 2011 and increase as the year goes on. With the passage last July of the Dodd-Frank Act and its establishment of the Consumer Financial Protection Bureau, we will be closely monitoring the impact on non-interest income for bank fees.

The change in the Washington power structure resulting from last November's elections will certainly add a new twist to the development of these regulations. We do know that we will be under a new regulator as of midyear as the Office of Thrift Supervision is merged into the Office of the Comptroller of the Currency. Following this merger in July, the OCC will become our new bank regulator and the Federal Reserve will than regulate our holding company.

Even with all of this regulatory and economic uncertainty going on around us, I think there are many points of encouragement and strength as we move further into 2011. The general economic picture is more encouraging than it was six months ago.

The economic indicators in the manufacturing sector and even in housing have been more positive in recent months. Consumer confidence while still tentative is growing as the markets recover and inflation stays under control.

We are encouraged by the strong core performance of First Defiance during these challenging economic times. The basic business plan is sound and as problem assets work their way through and out of the system, this bodes well for the future.

We have built a recognized respected brand throughout all of our markets and maintained significant market share in all of them. We're confident that our new core operating system is going to deliver innovations and efficiencies that will build on our historical success.

We look for this to be a year of controlled growth with more opportunities to establish new business relationships and further strengthen existing ones. We firmly believe in our strategy and feel that it was validated by successfully getting us through the challenges of the last several years. We thank you for joining us this morning and now we would be happy to take any of your questions.

(Operator Instructions) John Barber, KBW.

Don, you mentioned the Company completed its annual safety and sound exam in the fourth quarter. Just be clear, does that mean that you have -- results from the exam are in this current quarter?

That is correct.

Okay, great. And C&I [not in formal loans] were up I think it was $4.6 million this quarter versus last quarter. Can you talk about what drove that increase?

As far as specific loans in the C&I category, is that -- I'm trying to think what --

Yes, if it was specific loans, that would be great (multiple speakers) color.

There was one large credit that went into the non-accrual status which was about $4 million in the quarter.

Okay.

That's the biggest driver of the increase in that category.

Okay, thanks. And then the decline in service charges, was that mostly related to the full run rate of Reg E?

Yes, that relates a lot it -- it's not so much the interchange as it relates to NSF and that pattern of change when we looked at some of the details.

Okay, so outside of seasonality, is this a pretty good run rate?

I would hope so (multiple speakers)

Depending what comes out of the -- rewriting the regs after Dodd-Frank.

I think there still is a little contraction in that category to run through the system here, but hopefully it's close.

(Operator Instructions) Brad (inaudible) Rosenthal Partners.

Just as a follow-up with the drop in service charges, I know a lot of banks are talking about maybe new pricing models to recoup some of those fees. Is that something that you are considering?

Certainly is something that we're having some discussion on here is what we can do to offset some of that. Again we're kind of waiting to get a little bit better feel for exactly how the regs are going to be written.

The FDIC came out with some guidance a month or two ago in regards to their view on for instance on overdraft programs and such. While they've issued it as guidance, we will not be shocked to see the regulators pick it up as policy. So we are studying those and certainly looking at anything that we might be able to do to offset some of that runoff.

Sure, appreciate it. Looking at the other expenses and backing out the $800,000 of one-time data processing conversion expenses, it looks like core non-interest expenses were closer to $15.7 million. Looking forward -- and I was thinking there could be some cost savings going forward with the data processing conversion, what should be expectations for total non-interest expenses?

Well, we expect to have some benefit from the core conversion. What is not in the first quarter would be any impacts from any compensation increases. We have that on a schedule. It's not effective at the first of the year.

We have a large first review period there. So there'll probably be an expectation of some compensation adjustments in the latter part of the quarter as we finalize that process.

Sure, okay. Let's see, one more question here and I'll let someone else jump in.

It looked like in the fourth quarter there was that rather large commercial real estate net charge-off. Could you just give us without telling us the identity of the client, could you just give us what happened in the quarter with that credit?

What was the industry? What was the balance or beginning balance of the loan? Why was it (inaudible) $4 million? Just any type of characteristics, you could help us out?

I'll let Jim Rohrs answer that question.

It was a large shopping center loan, about $4 million loan that we had taken a reserve of about $2 million on some time ago, and the charge-off resulted from that moving through the system where we think that will probably come into OREO hopefully yet this month. So it's a recognition more of the loss being more probable than possible, so we did take that charge-off.

Okay, so if it was a $4 million loan, probably your typical 80% loan to value, so it was probably originally worth the property $5 million and now (multiple speakers)

In excess of that, probably closer to $6 million (multiple speakers) property moved into a little bit of distress, so the value is down because of the distress but also because of just general market conditions.

Right, so from going from $6 million to $2 million, so down 66%, is that primarily just from tenants leaving the shopping center or is it tenants are still paying, it's just strictly kind of they overbought originally?

Tenants leaving.

Okay. Can you tell us what other exposures to kind of similar situations, shopping centers, you guys have in the portfolio?

Yes, Brad, actually we have relatively low -- we've got less than $30 million outstanding on shopping center loans right now out of our total portfolio. So it's not an area of concentration by any means.

And those other portfolio of shopping centers are performing a lot better, I take it?

Yes much better.

Okay, appreciate it. I'll let someone else jump on.

Ross Haberman, Haberman Management Corp.

Have you put an estimate on what the additional overhead or legal costs you might have to incur because of the new Dodd-Frank legislation?

We haven't really identified a certain number, Ross, but we know it's going to be an increase. We'll probably have to add -- whether we do a lot of it outsourcing to get some experience here or add staff to comply with some of those requirements. But we haven't really put a pencil to it yet and figured out an exact dollar, but it's going to be more than what we would like to see, I'm sure.

And what is your expectation in terms of let's just say, I don't know, $0.5 million for argument's sake, how are you going to try to offset some of that increased cost, whatever it might be?

I think again as we were talking before, I think that we're going to have to revisit our fee structure overall if the additional costs are going to be put on us for compliance with some of the new regulation. We're going to most likely have to look at offsetting a lot of that via fees.

I think another area as we kind of alluded to is with our new core operating system. As we start to really understand and utilize the benefits of that system and the conversion we went through, we hope to get more efficiencies on the operations side as well.

(Operator Instructions)

Thank you very much for joining us this morning. Being no more questions, we appreciate your interest and look forward to talking with all of you in the future. Thank you.

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