Executives
Ellen J. Roberts – Vice President Investor Relations
Ted T. Cecala – Chairman of the Board & Chief Executive Officer
Robert V. A. Harra, Jr. – President, Chief Operating Officer & Director
Bill Norris – Chief Credit Officer
David R. Gibson – Chief Financial Officer & Executive Vice President
William J. Farrell – Executive Vice President
Analysts
Charles Ernst - Sandler O’Neill Asset Management
[Andrea Jale] – Barclays
[Moraly Goco - Keith Barrett Wilks]
[Robert Holy] - Samlyn Capital
Stephen Moss - Janney Montgomery Scott LLC
Gerard Cassidy - RBC Capital Markets
Andrew Stapp - B. Riley & Company, Inc.
Thomas Alonso - Fox-Pitt Kelton
Robert Rutschow - Deutsche Bank Securities
Wilmington Trust Corporation (WL) Q3 2008 Earnings Call October 17, 2008 10:00 AM ET
Operator
Welcome to the Wilmington Trust third quarter earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Ellen Roberts, Vice President Investor Relations for Wilmington Trust.
Ellen J. Roberts
I want to remind you that all the supporting materials are on our website at www.wilmingtontrust.com. This call is being recorded and the replay details are on our website as well as in the release itself.
The agenda this morning features remarks from our Chairman and CEO Ted Cecala. Also with us this morning are Bob Harra, who’s our President and Chief Operating Officer and also head of the regional banking business. With him is our Chief Credit Officer Bill Norris, our Chief Financial Officer Dave Gibson, as our the head of our Corporate Client Services business Bill Farrell, and the head of our Wealth Advisory Services business Mark Graham.
We’ll start with remarks from Mr. Cecala and then he will take questions. I want to remind you that news reporters may be attending this call and all participants are permitted to ask questions. We don’t have a queue here. We don’t see who’s on the call so we do not play favorites or control who calls in. So everyone’s welcome to participate.
Now I have to give you the forward-looking statement disclaimer. The presentation that follows contains certain forward-looking statements. Our ability to achieve the results reflected in those statements could be adversely affected by among other things changes in national or regional economic conditions, changes in market interest rates, significant changes in banking laws or regulations, the impact of accounting pronouncements, increased competition for business, higher than expected credit losses, the effects of acquisitions, the effects of integrating acquired entities, and the substantial or permanent loss of either client accounts and/or assets under management at Wilmington Trust and/or our affiliate money managers Cramer and Roxbury Capital Management, unanticipated changes in the regulatory and additional legislative or tax treatment of business transactions, and uncertainty created by unrest in other parts of the world. We include other information about factors that could cause our actual results to differ materially from those reflected in these forward-looking statements in the disclosure documents filed publicly from time to time.
With that I’ll turn it over to Ted.
Ted T. Cecala
Thanks for joining us for this discussion of our results for the third quarter. I hope you’ve had a chance to review our earnings release.
As noted in the release we recorded net income for the quarter of $23 million or $0.34 a share. This amount was reduced by the previously-announced charge against the value of the company’s investments in perpetual preferred stocks issued by Fannie Mae and Freddie Mac. That charge was $19.7 million on a pre-tax basis and reduced net income by $12.5 million or $0.19 a share. On an operating basis adjusting for the effect of the charge, net income was $35 million or $0.53 per share.
We believe that measuring our progress on an operating basis is more representative of trends within our businesses and permits better comparisons with other recording periods.
There were other key developments during the quarter. Loans on average grew during the quarter in both the commercial and retail categories. The net interest margin rose 10 basis points this quarter as the repricing of certificates of deposit both national and retail lowered our cost of funds. Asset yields also declined but to a smaller degree. The provision for loan losses was $19.6 million this quarter. This level of provision was necessary to build the reserve as previously identified credits moved through our risk rating system as well as for newly classified credits.
Both wealth advisory services and corporate client services posted higher fees for the quarter versus the previous year. Corporate client services fees increased both from the fees associated with the acquisition of AST Capital Trust and from other core services. Wealth advisory services fees rose primarily from a trust business that was added from the AST acquisition.
Expenses were up 2% over last quarter. In fact if we isolate the expenses associated with the acquisition of AST, our core expenses declined from the previous quarter.
What I’d like to do now is begin my remarks about the businesses, and I’ll start with the regional banking business.
First I’d like to point out that our banking business is focused on the Mid-Atlantic region stretching from Southeastern Pennsylvania south through Delaware into Baltimore. Essentially our market area is within a two-hour drive of Wilmington. This region remains our core market and we focus our commercial lending in this area. I’m very pleased with the third quarter results of our regional bank.
Let me start off with the net interest margin. As I just mentioned, the net interest margin rose 10 basis points reaching 327. That’s up from the second quarter and this is primarily due to the repricing of our longer term liabilities. The rate resets that occurred throughout our CD portfolio were the largest contributor to the lower liability costs which in total declined 22 basis points.
The loan portfolio grew $373 million on average during the quarter. This was a 4% increase on a trailing quarter basis. Compared to the same quarter a year ago loans were up 15%.
As I mentioned earlier, growth was recorded in both the commercial and the retail portions of the portfolio. Commercial loans rose by $295 million from last quarter and retail loans increased $78 million. This is consistent with the makeup of the economy within our core banking markets and is what enables us to generate balanced loan growth. As I have said on previous calls, our regional economy is well diversified with businesses involved in life sciences, financial services, manufacturing, health care, agriculture and tourism.
Now I’d like to talk about our credit quality metrics. The provision rose to $19.6 million, up $1.1 million from the second quarter to bolster the loan loss reserve. A portion of that increase was to support the growth of the loan portfolio. In addition, credit expense rose as previously classified credits moved through our risk rating system and as new credits were downgraded.
These risk rating changes required that additional reserves be set aside. Overall, total reserves were $122 million up $9 million from $113 million last quarter. The reserve coverage ratio stands at 1.27%, up 5 basis points from the last quarter.
Net charge-offs for the quarter were $10.5 million down $1.3 million from the second quarter. The net charge-off ratio for the quarter was 11 basis points and year-to-date amounted to 30 basis points.
Non-accruing loans rose by $28.5 million and reached $100 million. Two clients, real estate developers in Central and Southern Delaware, accounted for the majority of the increase.
Other real estate owned or OREO was $14.5 million, and that was down $2.2 million from the second quarter. The decline from last quarter reflects the sale of several properties in a luxury home development in Montgomery County, Pennsylvania.
Loans past due 90 days or more increased by about $7 million to $28.7 million. The largest part of the increase roughly $5 million was for a commercial construction real estate relationship in Cecil County, Maryland. Our internal credit quality metrics remain stable and the percent of loans rated pass remained at 96%.
Now I’d like to turn to our fee businesses. I’d like to start with the corporate client services fees which rose $10.8 million or 46% versus last year and were up 9% from last quarter. Capital market activity continued to present a challenge for our business during this quarter. Fewer opportunities remain for the traditional trustee and other support services we provide for transactions.
Due to this challenge we’ve redirected our efforts to bankruptcy and other distressed debt services. As a result, capital markets revenue is up 17% from last year and down just 3% from last quarter. As we announced earlier in the quarter, we have been appointed to the creditors committee of Lehman Brothers bankruptcy filing.
In addition we are seeing demand for services that support products such as repackaged municipal and corporate debt as well as escrow administration.
Retirement services fees reflect a full quarter of fees for the AST acquisition that closed on April 30. These more than doubled versus last year and rose more than 50% from last quarter. In addition we announced that we completed our acquisition of UBS Fiduciary Trust Company this past Monday. The combination of AST and UBS positions us as one of the largest US providers of trust accounting, custody and benefit payment services for unbundled retirement plans. On an annual basis we expect the UBS transaction to add about $38 million of retirement services revenue and about $36 million of sub-advisory expense and to be non-dilutive to earnings.
Now I’d like to move to wealth advisory services where revenue declined modestly from last quarter and rose 2% from a year ago. These figures compare to declines in the S&P 500 of 9% and 24% over the same time frame. Wealth advisory fees benefited from the addition of the personal trust segment of the AST acquisition and continued growth of our family office practice. Mutual fund fees rose 6% from last quarter and 28% from last year. Most of the company’s mutual funds are money funds and these increases reflect the movement of clients away from more volatile investments.
Now I’d like to go into our expenses. Operating expenses for the quarter increased 2% from last quarter and 12% from last year and included a full quarter of AST expense. If we adjust for the expense associated with AST, operating expenses rose 4% versus last year and declined 3% on a trailing quarter basis. While our staff headcount rose 267 from a year ago on an equivalent basis, approximately 179 staff members were added as part of the AST acquisition. Looking at the fourth quarter and beyond we expect few additions to our overall complement.
Our remarks to this point have offered a summary of the results of our businesses in an environment that while challenging has not produced the same stresses at Wilmington Trust that exist at other companies. There are two topics though that seem to be at the top of everyone’s list these days: Capital and the investment portfolio.
First, I’d like to talk about our capital. We remained well capitalized as all regulatory capital ratios exceed the amounts required by the Federal Reserve to be considered a well capitalized institution. All risk-based capital ratios increased during the quarter. At the end of the quarter the total risk-based capital ratio was 1124 up 10 basis points from the end of the second quarter. The Tier 1 risk-based capital ratio was 677 up 3 basis points and the Tier 1 leverage ratio was 652 up 7 basis points.
As you know we are conservative in the management of the company and we have determined that we would like a larger margin of safety with our capital ratios. That resulted in a market offering of common stock that was launched on September 22. This program is described in a base prospectus and a prospectus supplement filed with the SEC. These documents are available on our website. The program allows the company to sell shares from time to time as often as daily. Total shares sold to date are 695,900 shares with net proceeds of $20.4 million.
Because this is an ongoing equity offering, we are restricted in our ability to talk about the program as some of you have learned when you called with questions after we made our filings.
Now I’d like to turn to the investment portfolio where we have received questions about the market values of a segment of our investment portfolio, specifically perpetual preferred and trust preferred stocks. All the securities are under water. We believe this is due to market illiquidity. Therefore we have used discounted cash flow models to determine their value under the current accounting interpretation. Based on that analysis we believe that there is no other than temporary impairment at this time.
Before I wrap up, I would like to make a few comments about our margin given the recent decline in the fed funds rate. The recent 50 basis point reduction will compress our margin. However the current dislocation within the credit markets, specifically the high term LIBOR rate has made it more difficult to forecast accurately the net impact on the margin.
Approximately 40% of our commercial loans are tied to LIBOR based indices that reprice on a monthly basis. The upward repricing of these loans will in the short run offset some of the margin compression. Eventually the higher cost of LIBOR will work its way into our funding costs and result in a narrower margin. Should term LIBOR rates return to their historic relationship to fed funds we would expect the margin to compress approximately 7 basis points over the next 12 months. The exact path and speed with which LIBOR adjusts will affect the extent and timing of the impact on our margin.
Obviously there is a lot of analysis that went into that so we’re providing that as our best estimate of what could happen.
Before I open up the call to questions, I would like to emphasize a few points.
First, despite the volatility that exists in today’s credit capital and equity markets we are encouraged by the results of all of our businesses. All of them continue to capture new business in the face of the current turmoil and uncertainty. At the same time current conditions are difficult.
The recent cut by the Fed will put pressure on our margin even as the LIBOR dislocation temporarily offsets some of that through our loan portfolio.
We recognize credit losses are also a fact of the current environment. We are seeing net charge-offs increase. We do not expect them to move much beyond the high end of our historic range.
And finally, capital adequacy is a critical issue in today’s environment. All of our capital ratios remain strong and we are augmenting our capital position through the current active market equity offering.
This concludes my prepared remarks. Thank you for your participation today. With that I’ll open it up for questions.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from Charles Ernst - Sandler O’Neill Asset Management.
Charles Ernst - Sandler O’Neill Asset Management
A couple questions on the TruPS. Can you tell us how much the dollar amount of the TruPS that are pools versus single issues?
David R. Gibson
We have of our total pool $52 million are the single names and the balance are pools.
Charles Ernst - Sandler O’Neill Asset Management
The balance meaning based off of $189 million?
David R. Gibson
At the end of the quarter the total value was about $208 million.
Charles Ernst - Sandler O’Neill Asset Management
At the end of June the mark was $227 million, you moved it in held-to-maturity at $189 million, and then you showed the securities had increased in value at 9/30. Is that right? I just want to make sure I’m understanding it.
David R. Gibson
That’s correct.
Charles Ernst - Sandler O’Neill Asset Management
But the values on the balance sheet reflect the $189 million?
David R. Gibson
Correct. They were moved at $189 million to held-to-maturity and that’s the value that’s on the balance sheet. Any difference from that point is just a footnote item.
Charles Ernst - Sandler O’Neill Asset Management
Why did the value of the securities go up after the move to held-to-maturity?
David R. Gibson
We’re using level 3 valuations and it’s highly volatile based on the assumptions. We use cash flow models to do that valuation. So I think it’s just within the nature of the beast when you do a present value and calculation like that, but the value may move around some.
Charles Ernst - Sandler O’Neill Asset Management
But there’s nothing that you can point to in terms of a specific factor?
David R. Gibson
No, there’s no one specific thing that we can say that drove that. It’s just the combination of all the assumptions that we have to use and estimates to project the cash flow and do the discounting.
Charles Ernst - Sandler O’Neill Asset Management
Can you add any color to the individual issuers that you have exposure to in terms of the quality of the companies?
David R. Gibson
We haven’t really disclosed the individual names. They’re predominantly money center companies.
Charles Ernst - Sandler O’Neill Asset Management
Can you give any color about the dollar amount by tranche of the trust preferreds?
David R. Gibson
Tranche?
Charles Ernst - Sandler O’Neill Asset Management
How much is AAA? How much is AA? How much is A?
David R. Gibson
I can’t at this point.
Charles Ernst - Sandler O’Neill Asset Management
That might be something that would be very helpful in the Q or something like that. And then just to confirm, the original value of these trust preferrreds had a face value I think of about $330 million. Is that right?
David R. Gibson
That’s correct.
Charles Ernst - Sandler O’Neill Asset Management
So today’s value of $189 million means that you’ve got them at about $0.57 on the dollar?
David R. Gibson
I haven’t done that yet. If it works, yes.
Operator
Our next question comes from Andrea Jale - Barclays.
Andrea Jale - Barclays
Loan growth actually strengthened compared to the last quarter, especially on the commercial side. I was hoping you could share more color on the drivers behind that. For example, do you think your business customers are drawing down their lines to build up their own cash reserves? And your outlook, how long do you think this trend lasts?
Bill Norris
I would say the loan growth we see is not characterized by a lot of clients drawing down on their lines of credit. We have not seen that other than in the normal course of business.
What we tend to see any time you have a cyclical downturn quite frankly is a lot of opportunity to come our way. Because of our story, because of the way we do business in the local market, we’ve seen in before in other downturns, we get a lot of folks that all of a sudden they’re a little more interested in talking to us that might have had a relationship with a larger bank that they’re all of a sudden feeling a little less comfortable with.
Quite frankly, one of our challenges as I think we’ve talked about before isn’t good new opportunities; it’s kind of managing the pace of those good new opportunities. So we saw existing credit with existing customers of course to support their ongoing needs. We saw some opportunities with new C&I businesses that were looking for more of a relationship approach, which we’ve seen in prior downturns. That’s on the C&I side.
On the CRE side we saw some additional fundings largely for existing projects on the residential side but that was a smaller part of that CRE growth. More of it was in either owner-occupied type real estate projects or things that would fall into the income property heading, office buildings, medical office buildings, retail type projects that we’re financing.
And we had one large relationship with an institution in our market that added to the C&I growth in the third quarter. I think that kind of rounds out what we saw in Q3.
Ellen J. Roberts
Bill, I just want to clarify what you said about CRE. Were you talking about the increase in commercial mortgage balances or are you talking about -?
Bill Norris
I’m talking about both. I’m talking about both construction and mortgage balances.
Ellen J. Roberts
I just wanted to make sure everybody understands that.
Andrea Jale - Barclays
How about on the consumer side? What trends could you share with us? What outlook could you share with us?
Bill Norris
The trends there are pretty flat. We made kind of a conscious decision back in the end of the second quarter/beginning of July to look to manage the growth of that overall consumer portfolio flat, maybe even a little down as we move through the rest of this year and into ’09. And we’ve seen that. In the aggregate I think we would expect going forward that that number would be flat to slightly down.
No major trends within the existing portfolio. I think the open end balances are up a little bit which may be folks drawing on the open end commitments but as I think you know that’s not a huge part of our portfolio. So that’s not a huge deal mover. But overall we expect those consumer loan balances to be flat to slightly down over the next year.
Andrea Jale - Barclays
Changing gears to the deposit side, core deposits boasted decent growth as well. Could you share with us what your customers are doing, what competition is like?
Robert V.A. Harra, Jr.
The growth you’re seeing there over the last year is from WTDirect, which is our online savings account that we’ve offered, and to some extent some increased personal deposits flowing into the company due to recent circumstances.
Insofar as competition goes, you certainly see the rates as much as I do; advertised specials that find themselves into the daily newspapers depending upon various institutions’ need for and degree of pain that they want to pay for core deposits. We’re going to be focusing our consumer activities in ’09 on core deposit growth so we’ll see more promotions from our company. But to your question about competition, it’s pretty much all over the board; as I say, things that you already see advertised.
The questions that we’re getting mostly from our own consumer clients are more along the lines of deposit insurance and we are seeing some nice inflows from some competition but it’s not as if it’s breaking the doors down.
Operator
Our next question comes from [Moraly Goco - Keith Barrett Wilks].
[Moraly Goco - Keith Barrett Wilks]
Going back to the trust preferred question for a minute, I know you moved them to held-to-maturity and it’s marked down to $0.50 on the dollar and it’s been kind of marked down for a couple of quarters now. Is there any risk at all even though it’s in held-to-maturity? Is there any risk down the road if it continues to be marked down, the fair value’s lower than the book? At some point there is a risk that even though it’s temporarily impaired that you may be forced to take a charge? Have you had any discussions with your auditors? How are they viewing this issue if it continues to be changing or fair value’s materially lower than the book?
Bill Norris
I caution to say they’re not trading so the valuations are very difficult for the securities. I think the rules about other than temporary impairment haven’t changed with respect to evaluating securities whether they’re in held-to-maturity or available for sale. Held-to-maturity just keeps the volatility of the values from running through our OCI account and equity.
We are still required on the security by security basis to evaluate each one, look at the cash flows of those securities and determine whether that impairment is within temporary. So that’s on ongoing process that we have. It hasn’t changed. We believe that the securities that we hold the cash flows are very strong and the structures of those securities are efficient to get us our cash flow back, which is the critical part of the OTTI evaluation. But certainly if there’s continued deterioration in any of those securities, we are subject to the mark-to-market rules and we’ll evaluate those as those conditions change.
Obviously we have made the determination this quarter that we have no other CTI adjustments to make and it’s just an ongoing process that we have to go through.
[Moraly Goco - Keith Barrett Wilks]
Can you give us a sense for what your pro forma capital ratios may look like including the recently closed UBS Fiduciary Trust deal?
Bill Norris
The UBS deal is a fairly modest financial transaction from a capital perspective so I wouldn’t think that it would have but a few basis point impact on our capital ratios.
[Moraly Goco - Keith Barrett Wilks]
Looking at the economics of your guidance on the annualized revenues and expenses, it doesn’t look like it’s very profitable. Just looking at your guidance, you give $36 million to $34 million. Is that your expectation for the first year or does it include any one-time costs?
David R. Gibson
From a financial standpoint it’s a fairly modest initial transaction. I think the nuances of how they record the revenue and expenses, that’s why we recorded those numbers, will inflate debt to revenue and expense. We always devalued it at the net level but I don’t think the accounting might allow us to net those fees. I think what we view as the real opportunity to participate in that network of distribution of UBS and access to that network.
Bill, you want to add some color to that?
William J. Farrell II
Dave I think hit the important topic there, and that is the opportunity for distribution within UBS and their financial advisor network, to continue to grow that business.
[Moraly Goco - Keith Barrett Wilks]
Could you just give your thoughts on the TARP program and the preferred program and what your thoughts are? Is this something that you’d look at and do you think you would be eligible to participate in the program?
David R. Gibson
I think that’s a good question. I have many questions myself. We are obviously reviewing all of the programs that have been announced by the Treasury and the FDIC. I think it’s very difficult right now for us to tell you one way or the other because I think there’s as many questions as answers to some of those programs and the devil’s in the details there.
So I think we are obviously very aware of them. We’re analyzing them closely, and really I got 10 emails this morning from various parties trying to do some interpretation of what’s out there. As we read through the programs and filter out the facts from the speculation, I think we’ll be in a better situation but it might take a bit of time and working through the government agencies to see what we may or may not do.
[Moraly Goco - Keith Barrett Wilks]
When I look at the cost of the national CDs that obviously declined sequentially in the quarter and if I look at trying to get a better handle on what’s the kind of benchmark that I should be looking at that drives the cost of these CDs, is it the LIBOR or is it something else? Can you give us some idea?
David R. Gibson
I think LIBOR is the most direct reference rate that I would direct you to for those CDs, and I think in Ted’s comments what we tried to articulate is that the disconnect of LIBOR with Fed funds right now provides both opportunity and challenges for us. About 40% of our loans we price off that LIBOR rate but a fair amount of that type of funding also reprices off LIBOR. So potentially we may have pressure on the funding side as LIBOR continues to stay elevated.
Operator
Our next question comes from [Robert Holy] - Samlyn Capital.
[Robert Holy] - Samlyn Capital
Another question on the pooled trust preferreds. Can you just give us a sense of how much of the pooled trust preferreds that you’re in have experienced deferred payments?
David R. Gibson
At this point we haven’t disclosed that amount. It’s kind of a challenge to do the waterfall calculations and how they work. Our cash flows have not been impacted by our underline securities which supports our OTTI evaluation. I’m afraid that’s about as much as I can say about that specifically.
[Robert Holy] - Samlyn Capital
Are most of the ratings in the AAA level?
David R. Gibson
We have a range of ratings. I think Charlie asked for the detail of that, which we haven’t disclosed, but the range is from AAA down to A and a few BBB.
Operator
Our next question comes from Stephen Moss - Janney Montgomery Scott LLC.
Stephen Moss - Janney Montgomery Scott LLC
With regard to the construction loans, was the growth this quarter more in draw-downs or new business?
Bill Norris
It was a little bit of a combination of both. I would say probably a little heavier weighted towards the completion of existing projects and draw-downs associated with those. That’s a combination of some of the residential projects we’re in that continue to build out and sell out as well as some of the previously-mentioned income property projects that we’re financing.
Stephen Moss - Janney Montgomery Scott LLC
On the wealth management side, what would you expectations be for revenue here for Q4?
Mark A. Graham
Expectations as we look forward actually continue to add for the reasons I think Bill and Bob mentioned on the banking side. Our story and reputation and fiduciary focus continues to add clients in this market and we continue to do that across all of our national markets.
Stephen Moss - Janney Montgomery Scott LLC
Given the market declines here, any ballpark feel where revenues might head for the quarter?
Mark A. Graham
I don’t know what the percentage of equities are.
Ellen J. Roberts
It’s at 46%.
Mark A. Graham
About 40% is equity so if the market declines, we’re going to feel that directly in that portion of the portfolio primarily. Certainly if the market declines, those VAT portion of our revenue is under pressure. I can’t give you a specific dollar amount because I don’t know where the market’s going to be.
Operator
Our next question comes from Gerard Cassidy - RBC Capital Markets.
Gerard Cassidy - RBC Capital Markets
I think Ted you mentioned that the reserve building was due to some of the credits going into classified from where they were before. Was that in the commercial area or commercial real estate area? And second tied into that question, do you guys have any shared national credits in the book, and if you do, was that reflective of the exam we just had announced a couple weeks ago?
Bill Norris
Can you repeat the first part of your question?
Gerard Cassidy - RBC Capital Markets
Ted mentioned on the reserve builds that it was partly due to some of the existing identified problems that you guys have had in the past two to three quarters but it was also due to some newer credits becoming classified. If I heard him correctly, where is that coming from? Is that just pure commercial or is it still in commercial real estate? And second, do you guys have any shared national credits as defined by the regulators, and if you do, the classification move that you’ve identified was the cost of that shared national credit exam where the results were announced a couple weeks ago?
Bill Norris
I think in terms of things moving through the risk rating spectrum and falling into the classified category, it’s a little bit of a mixture. There is some commercial real estate; there’s some C&I that’s in there. Obviously it’s not one single credit. It’s a little bit of a mixture and a bit of a balance between the two.
As far as the shared national credit question goes, we do participate in some shared national credits. As far as the reserving in the third quarter goes, we do participate in one shared national credit that was recently downgraded to classified status in this most recent review. Our share is not a big number but it did put it into a classified category, and based on our methodology it does account for a little bit of that reserve in the third quarter. But it is not a material amount.
Gerard Cassidy - RBC Capital Markets
And how big is the shared national credit portfolio?
Bill Norris
I don’t know that sitting here. I’ve got the reports in the back of my desk. I don’t have the exact number. We probably participate in a rough number, maybe a dozen. Most of those we participate in, there’s one or two that we lead. Again as you know it’s not a big part of what we do. We can get you the information. I just don’t have it sitting here.
Gerard Cassidy - RBC Capital Markets
That would be fine.
In regard to the margin, if the Federal Reserve in view of the economy weakening quite dramatically since September, further evidence today with the housing market of course not doing very well, I know they cut the Fed funds rate another 50 basis points by January or February of next year, what does that do to the margin if you look out over 2009 considering the cost of funds for the industry now is getting pretty low?
I remember in the period when Fed funds reached 1%, banks had a tough time passing on those lower interest rates on the deposit side because rates were so low. Do you guys foresee that could be a problem in ’09 if we do get to a 1% funds rate by January that it may be more difficult to pass it on to the liability side of the balance sheet?
David R. Gibson
Maybe frame it a little bit, it’s difficult now to pass the Fed rates. We put in our press release that the recent Fed move, of course this assumes normal relationships with rates and with costs it’s about 7 basis points on an annualized basis over a 12 month period, so an additional 50 basis points is going to put additional pressure on our margin. I can’t give you the specific basis point number but it’s going to be equal or more probably than in the most recent 50 basis point just because of the pressure that you described in terms of the funding. On the deposit side, there’s only so low you can go at some point.
Gerard Cassidy - RBC Capital Markets
With bankruptcies rising and likely to rise even further, obviously you guys are well positioned to capture some of that additional business. As you pointed out your capital market services numbers were up nicely year-over-year. Could we foresee that being a 15% to 20% revenue grower in ’09 if this recession is as bad as some people are anticipating?
William J. Farrell II
Really it depends on the type of bankruptcy that occurs and how quickly it’s resolved and the need for institutions like Wilmington Trust that doesn’t have a conflict to sit on the creditors committee. Fortunately or unfortunately, that being a strong business for us in ’09 and there are other pieces of business that go with that ultimately; collateral trusts, escrow type of work and other things that may go with that. So we’re expecting that to still be strong in 2009.
Gerard Cassidy - RBC Capital Markets
Circling back to the construction loan portfolio, could you guys give us an estimate of what percentage of the construction loan portfolio still is using interest reserves to make their payments?
Bill Norris
Sitting here I can’t. Again it’s a mix. As you know, almost every construction project that we have it’s very common to establish an interest reserve upfront. To give you that mix today, there are some developers as you know that want to pay out of pocket but I couldn’t give you that numerical breakdown sitting here today.
Operator
Our next question comes from Andrew Stapp - B. Riley & Company, Inc.
Andrew Stapp - B. Riley & Company, Inc.
Most of the increase in your non-accrual loans as well as your 90-day past due loans were primarily in construction loans and also to a lesser extent consumer loans. Can you give us some more color on that? How well collateralized these loans are, etc.?
Bill Norris
All the loans are secured be it the commercial real estate credits or those ones where I think we have the underlying real estate and obviously we’ll assess that and we’ll continue to assess the adequacy. I think relative to where we are today and the reserving we’ve done, we feel that that’s appropriate.
On the consumer side, a good portion of that comes from the indirect auto portfolio and of course you’ve got the underlying vehicles there. As I think we all know, as soon as you have to touch and pullback one of those vehicles, it’s not a question of whether you’re going to lose some money. It’s a question of how much and the used vehicle market this year obviously has been under pressure, especially the bigger vehicles, the lower mileage trucks and SUVs.
Again we have collateral on those but we have seen a trend although I think it’s leveled off a little bit here in the last month or so of lower values when we have to repo those vehicles and take them to auction which is what we do. If that trend continues to stabilize, that will obviously be a positive thing on the consumer front.
Andrew Stapp - B. Riley & Company, Inc.
Do you have an order of magnitude what the loan valuation is on these construction loans?
Bill Norris
Every one is different. It’s hard to make a blanket statement, so I’d rather not try to homogenize a response if that’s okay.
Andrew Stapp - B. Riley & Company, Inc.
Could you give us some color on the profitability associated with being named this trustee on the Lehman situation?
William J. Farrell II
When you look at these engagements, it’s basically on the amount of work that you have to do within any given engagement. I’d obviously say that the Lehman transaction is a very busy one at this point in time and it’s a good transaction for us to be participating in. We don’t speak specifically by deal and profitability.
Ellen J. Roberts
Bill, do you want to talk a little about how the fee structure’s different on that kind of job than a more traditional structure?
William J. Farrell II
I’d be happy to. The basic concept on the bankruptcy business is that for the basic part of the transaction is that we’re being paid by the hour for the work that we’re doing for the creditors committee. And then as I’ve stated before quite often that there are other opportunities that come out of the business that would be a fee for being a trustee or a fee for managing money or an escrow agent.
Operator
Our next question comes from Thomas Alonso - Fox-Pitt Kelton.
David R. Gibson
I just want to make sure that I got this right for the capital raise there. Was that 695,000 some odd shares to date or was that just the third quarter?
Bill Norris
That was as of the end of the third quarter.
Thomas Alonso - Fox-Pitt Kelton
In line with that, I know you guys are still looking at the TARP but would it be TARP and the equity ATM or would it be part in lieu of the equity ATM offering?
David R. Gibson
I can’t say for sure one way or the other because frankly I don’t fully understand all of the ramifications of the TARP program.
Thomas Alonso - Fox-Pitt Kelton
On the CDs to make sure I understand what you were saying, those national CDs are tied more closely to LIBOR rate than they are to say Fed funds so that recent cut down the road won’t sort of flow through on the CD cost or there’s no essential benefit there to mitigate the margin pressure from the asset side?
David R. Gibson
That’s correct. What we have to do on managing the balance sheet prospective is potentially move away from that type of funding to more traditional term Fed funds markets which may be more aligned with the Fed funds rate or also may not be. Every day the rates are moving around a lot so it makes it a bit of a challenge to project longer term where everything will settle out.
Thomas Alonso - Fox-Pitt Kelton
For the development loans that moved to nonperforming in the quarter, is that more of an issue of absorption or is it just pricing declines? Any kind of color you can give us there. What’s the underlying issue that’s causing them to go nonperforming?
Bill Norris
There are two major projects and both have different stories.
One is actually a project in the southern part of the state that has been selling actually fine. The major problem was there was a dispute between the two partners. I won’t get into all the sordid details but that dispute and one moved out to the Northwestern part of the country. It’s led to problems in terms of the oversight and the active management of the project.
The project itself in terms of price, in terms of sales price especially in this market is actually doing okay. But with this disagreement between the partners and trying to resolve that, it’s gotten very contentious and obviously out of our control between those two. That’s created a problem and has put this credit in the position where it is.
I will tell you that because of the sales pace there we do have some activity in terms of a third party and some activity in terms of interest in purchasing some of those lots and delivering on contracts, so there continues to be good activity there. We’ve got to work it out with these two warring parties. The partners right now are going through the foreclosure process and we need to play that one out. But that one is an attractive performing project.
The other larger one is a little different profile. It’s a high end more custom homebuilder down in the very, very southern part of the state more on the beach vacation market. This individual got involved in a situation where some folks walked on contracts for completed homes when the market got soft and basically he was left with completed inventory and nobody to show up at settlement. The debt level was higher than either of us would like and working through that.
As far as the prices on those types of properties go, they have been lowered. They are lowered. There was some recent sale in that project. It’s not a project. It’s actually more individual homes. There’s been a little bit of activity there and the prices are down. It’s going to take a little bit of time to work through that.
Those are the two big needle movers in that category and the stories are different.
Overall the traffic especially in that part of the state continues to be okay. The traffic’s pretty good. I would tell you in the past month things have slowed with all the turmoil in the headlines and everybody watching CNN, that traffic in September was [inaudible]. But overall our market down there continues to benefit from the net inward migration of folks and the story we always tell them about the advantages of Delaware living, especially Delaware living, which is affordable housing, access to the waterfront, low property taxes, no sales taxes. It continues to be a strong pull for a lot of especially retirees and pre-retirees.
So while everything is tempered from where it was a couple years ago, in that part of our market the traffic continues to be pretty good September notwithstanding.
Thomas Alonso - Fox-Pitt Kelton
Any color on sort of early 30 to 89 day delinquency trends in the quarter?
David R. Gibson
No.
Thomas Alonso - Fox-Pitt Kelton
Not to beat a dead horse, but just out of curiosity are any of those underlying banks or what not paying in kind? The idea that you get more debt as opposed to getting the interest?
David R. Gibson
I don’t know that I have that answer.
Ellen J. Roberts
They’re all structured that way Tom.
Thomas Alonso - Fox-Pitt Kelton
But the idea is that there’s an interest payment and if they can’t make the interest payment -?
David R. Gibson
I understand your question. I don’t think we’ve disclosed that.
Operator
Our next question comes from Robert Rutschow - Deutsche Bank Securities.
Robert Rutschow - Deutsche Bank Securities
My first question is on expenses. I’m assuming that there was probably some bonus reversal given the EPS this quarter. Can you talk about what the personnel expenses would have been ex that?
David R. Gibson
That’s a good leap there. I think we address our incentives continuously. The bulk of our incentives are really sales and performance factors. I don’t think any adjustments we’ve had this quarter were very material to be honest with you. They do tend to fluctuate up and down a little bit but there was no [dry] wholesale large reduction.
Robert Rutschow - Deutsche Bank Securities
Switching gears. In terms of the cost on the national CDs, did you see any benefits from disruptions in the CP market during the quarter in terms of pricing?
David R. Gibson
No.
Robert Rutschow - Deutsche Bank Securities
The last two questions would be more related to activity and housing prices. I guess we’ve got a fairly weak Philly Fed report yesterday and I’m wondering if you’re seeing any of those similar trends in your markets and if that has historically been a good indicator for you guys?
William J. Farrell II
I think one of the things with the Philly report that we looked at very closely was that the MSAs included in that report include some of the more industrial parts of Pennsylvania that are really not part of our core market place. I think those numbers are a bit skewed because of the MSAs that they include. I think we certainly as Bill highlighted things are slower and a little softer now but we haven’t seen dramatic changes in the overall economy where we operate primarily.
Robert Rutschow - Deutsche Bank Securities
Correlated to that, housing crises in your area have held up pretty well. Is that still the case in the last couple months?
Bill Norris
Yes. The existing home crisis, I guess year-to-year they’re probably down low single digits overall. If you’re talking about the last couple months, we haven’t seen any market change. Obviously over the longer period, over the last year to 18 months, I would say certainly there’s more softening on the new home prices.
And that’s a combination of a couple things. It’s a combination of lowering prices but it’s also a combination of those that are building and delivering homes going back and playing to the market and bringing to the market housing at a price point that they think is more attractive, downsizing the footprint, taking some features that used to be standard and making them upgrades, which at the end of the day allows them to bring a product to market at a little bit of a lower price points. So it’s a little bit of a combination but clearly period to period over the last 18 months the price of new homes has certainly declined more than existing.
Over the last couple of months, no I don’t think we’ve seen anything material on that front.
Robert Rutschow - Deutsche Bank Securities
Historically I guess the third quarter has been a little bit lower in terms of bonus and incentive accruals and so forth and rebounded in the fourth quarter. Would we expect the same thing going forward and are there any other dynamics we should think about there?
William J. Farrell II
Optimistically I would say I would hope we would see a rebound because that would mean sales have rebounded and are stronger across our markets, which would be the primary driver of a rise in incentives. But certainly fourth quarter historically has been our strongest sales quarter typically for a lot of reasons. Unfortunately a lot of those reasons are in the capital market that a lot of deals could get done at the end of the year which we’ve obviously talked a lot about how that business is shifting to other types of transactions. But certainly we’re hopeful that we end the year strong in terms of sales.
Operator
Our next question comes from [Andrea Jale] - Barclays.
[Andrea Jale] - Barclays
Some of the regional banks have already reported weaker non interest income be this from deposit service charges or retail brokerage. One way to interpret that is that’s a sign of a recessionary environment or a slowing economy. What can you share with us regarding your specific footprint?
David R. Gibson
Nothing that I’ve seen in the trends of our consumer fees that have indicated any real weakness at all. They’re relatively flat but I haven’t seen any dramatic shifting around at all in our consumer and other banking type fees.
Operator
There are no further questions in queue at this time. I’d like to turn the call back over to management for closing comments.
Ted T. Cecala
I want to thank everybody for participating in today’s call. Obviously we continue to focus on the growth of our businesses albeit in a very challenging environment. We look forward to talking with you next quarter.
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