The South Financial Group Q3 2008 Earnings Call Transcript

Oct.27.08 | About: South Financial (TSFG)

The South Financial Group (TSFG) Q3 2008 Earnings Call October 22, 2008 10:00 AM ET

Executives

Mary Gentry – Executive Vice President – Investor Relations

Mack I. Whittle, Jr. – President, Chairman of the Board & Chief Executive Officer

H. Lynn Harton – Senior Executive Vice President & Chief Commercial Banking Officer

James R. Gordon – Senior Executive Vice President & Chief Financial Officer

Analysts

Kevin Fitzsimmons – Sandler O’Neill & Partners L.P.

Ken Zerbe – Morgan Stanley

John Pancari – J.P. Morgan

Adam Barkstrom – Sterne, Agee & Leach

Andrea Jao – Barclays Capital

Robert Patten – Morgan, Keegan, & Company, Inc.

Jennifer Demba – Suntrust Robinson Humphrey

Brian Roman – Robeco Investment Management

Michael Rose – Raymond James

Jeff Davis – Wolf River Capital

Christopher Marinac – Fig Partners, LLC

Mirsat Nikovic – Integrity Asset Management

Jefferson Harralson – Keefe, Bruyette & Woods

Al Savastano – Fox-Pitt, Kelton, Inc.

David Darst – FTN Midwest Securities Corp.

Operator

Good morning and welcome to The South Financial Group third quarter earnings conference call. All participants will be placed on listen only mode until the question-and-answer session of this conference. This conference is being recorded. If you have any objections you may disconnect at this time.

I would like to introduce Ms. Mary Gentry, Executive Vice President of Investor Relations.

Mary Gentry

Good morning. Thank you for joining us. Presenting today are Mack Whittle, Chairman, President and CEO, Lynn Harton, Chief Commercial Banking Officer and James Gordon, Chief Financial Officer. We’ll then finish up with an analyst question-and-answer session. Chris Holmes, Chief Retail Banking Officer is also with us and available for questions.

In addition to our news release we have a quarterly supplemental financial package and presentation slides for today’s conference call which are available on the investor relations portion of our website. Similar to last quarter, the presentation slides summarize the focus of our comments today.

Before we begin, I want to remind you that today’s discussion, including the Q&A session, contains forward-looking statements and is subject to risks and uncertainties which may cause actual results to differ materially. We assume no obligation to update such statements. Please refer to our reports filed with the SEC for a discussion of factors that may cause such differences to occur.

In addition, I would point out that our presentation today includes references to non-GAAP financial information. We provided reconciliation of these measures to GAAP measures in the financial highlights of our news release and the supplemental financial package on our website.

Now, I’d like to turn the presentation over to Mack.

Mack I. Whittle, Jr.

Good morning everyone and thank you again for joining us. In this environment we’ve kept our capital, credit and liquidity at the top of our priority list. We’ve maintained strong capital position relative to our peers. We’re obviously aggressively dealing with loan problems and increasing our loan loss reserves while continuing to focus on our core deposit growth.

You may remember in early of 2008, when we saw our credit beginning to deteriorate we took early and decisive action. In the first quarter we identified problem loans early, built our specific reserves and had a sizeable increase in our non-performing loan. In the second quarter we raised capital and cut our dividend. This quarter we continue to proactively make tough decisions in preparation of the challenges ahead.

This quarter we maintained our capital level. Our quarter and intangible ratio remained at 7.94%, identical to the second quarter even with credit related net losses for the quarter and higher loan loss reserves. In fact, our regulatory capital ratios increased to 11.14% for Tier One and 12.64% for total risk based capital levels near or at the top of our southeastern peers.

This increase reflects the steps we’ve taken to preserve capital as we continue to proactively manage our balance sheet, both size and mix. We reduced our total assets by $281 million during the quarter partly due to charge offs as well as limiting loan growth and allowing our indirect loans in Florida to run off.

We continued to actively and aggressively manage problem loans. In the first quarter as I mentioned, we proactively responded to the credit conditions and increased the specific reserves of our non-performing loans. This quarter, with better clarity around the appraisals and the current market condition, we charged off some of these specific reserves now that these values obviously are better known to us.

This contributed to this quarter’s higher charge offs. In addition, we took $28 million in charge offs in connection with selling certain loans and moving additional loans into held-for-sale based on terms of pending sales transactions. We also increased our allowance for credit losses up to 1.97% of loans held for investment from 1.85% on June 30. We’ve written down our non-accrual loans both through charge offs and specific reserves by approximately one-third so the net non-accrual balance on our balance sheet is around two-thirds of the outstanding balance. Lynn will discuss later these actions and demonstrate how proactive we are in investing our problem loans.

We improved our liquidity position. We reduced wholesale borrowings, linked them to mix of borrowings and sought opportunities to grow customer deposits. The competitive environment kept deposit rates high in most of our markets. We have run some targeted deposit promotions both defensively as well as offensively and have opportunities to build new customer relationships.

You will recall that a year ago we rolled out our strategic plan with a focus on growing core deposits. These initiatives centered on improving our retail focus, leveraged our existing commercial base and developing private banking. Many of these initiatives are now in place and should contribute to our ability to gain traction in building stronger funding base over the long term, although they are impaired with this current environment.

In September, the board and I announced my retirement as Chairman, President and CEO by the end of the year. The board has formed a succession committee consisting of independent directors and have hired Spencer Stuart to assist in the search for the new CEO. This search is well under way. Our recent corporate reorganizational alignment has positioned us well for this transition.

As you may recall, in June of this year we formed an operating council consisting of James Gordon, Lynn Harton, Chris Holmes and me. The operating council is an integral part of our succession plan as we prepare for my retirement. Also, I will remain on the board. Our Board of Directors is working closely with the three operating council members to manage through this transition both now and after my departure. This core leadership team will continue to consistently spearhead efforts to execute our established strategic objectives.

Now I’d like to turn it over to Lynn to talk about credit quality.

H. Lynn Harton

As you would expect, residential construction and housing related loans continue to be the primary stress in the portfolio and as Mack mentioned our focus continues to be on aggressively identifying and disposing of problem assets. During the quarter we charged off $75.4 million of which $28.1 million was due to write downs on loans held for sale or sold. Additionally, third quarter charge offs hit $17.6 million from the recognition of previously established reserves on impaired loans, including $5.5 million related to the loans sold or held for sale.

I know there’s a lot of moving parts in the charge offs. I’d like to take a minute and just go over some of the drivers. If you look at the chart on the bottom of slide five you can see the loan sales, the legal balance charge off in the sales price and also the difference between the pending loans and the ones we have already closed.

One of the things that the chart doesn’t outline that I think is important is that this is the first time we have sold loans that were actually in accrual status when we sold them. We obviously looked forward and said these are going to be problem loans. We like knowing that the environment is continuing to look challenged. We wanted to move some of those problems forward into this quarter to deal with and that number of the $71.7 million in legal balance of loans that were sold, $26.2 million would fit into that category; the loss on which was $13.1 million.

So as you look at the $75.4 million in charge offs, from my perspective we’ve tried to be aggressive and move some charge offs up that we would have recognized to happen later quarters and that number would be $13.1 million. Additionally, as we mentioned we wrote down, we recognized charge offs on credits we had specific reserves on. $12.1 million of which was not in the loan sale.

As you recall back to the first quarter in Florida the environment changed fairly rapidly. It was difficult to get appraisals. It was difficult to understand what the true values were so we reserved more and charged off less until we had some clarity. We believe at this point we’ve got more clarity on that and so we recognize the $12.1 million that had already been expensed through the provision but we recognized it in charge offs this quarter.

So one way to look at it would be to take the $75.4 million less the $13 million that we’re moving forward into this quarter less the $12 million that’s really a loss that occurred in prior quarters that was already provided for, get you in a run rate of about $50 million for the quarter, a number that I’m certainly not proud of; certainly not satisfied with. I think it’s more representative of underlying run rate.

Our provision did exceed net charge offs by $9.2 million and increased the allowance from 1.85% to 1.97% of loans. Our coverage of non-performing loans remains relatively unchanged and now stands at 0.84 times. Non-performing assets excluding non-performing loans held for sale stands at 2.62% which is an increase of 32 basis points from the second quarter. Non-performing loans held for investments increased by approximately $20 million from $220 million at 6/30 to $240 million at 9/30.

Looking further into different parts of the portfolio, slide six of the presentation, you can see that residential construction with non-accrual loans is 9.03% this quarter versus 8.47% last quarter. It continues to be our primary challenge. 59% of our net charge off this quarter and 53% year-to-date are related to this portfolio. I’ll cover residential construction in more detail in just a minute.

As you look at the other portfolios, our C&I portfolio continues to hold up with minimal increases in past dues and non-accruals. Losses for the C&I portfolio did increase for the quarter though primarily in industries or individuals with ties to the residential housing business. Income property and commercial development also continue to show performance comparable to second quarter levels. Indirect continues to perform as expected and outstandings are down approximately $50 million in that portfolio due to our decision to cease originations in the Florida market.

So if you could move to slide seven which breaks out our residential construction portfolio by geography, Florida performance as expected continues to be very challenged with non-accrual loans 15.5% in this portion of the portfolio versus 13.2% in the prior quarter. 88% of our residential construction net charge offs are in our Florida market. Our residential construction balances are down in Florida by $187 million since March 31 and Florida residential construction now totals 44% of our construction loans versus 50% at March 31.

In North Carolina we had hoped for some improvement by this time in the year. While we have made underwriting improvements, the residential housing market in the mountains of North Carolina have weakened and this is impacting our numbers particularly in the past due category as you’ll note on the slide. South Carolina however continues to perform better than our other markets.

Turning to slide eight we have provided some additional detail regarding the carrying basis of our commercial non-accrual loans. The first column represents the unpaid legal balance of the loan which totals $248 million subtracting our realized charge offs on these specific loans totaling $53 million. This is our current reported non-accrual loan balance as of 9/30 of $195 million.

Additionally, through our provision expense we have recognized account specific reserves of $30 million on these accounts. Our resulting net balance considering both charge offs and specific reserves totals 67% of unpaid principal which we believe is an appropriate level and reasonably consistent with what we’ve seen in our loan sales activity.

If you look at our loan sales in the last two quarters for loans that have gone through our non-accrual write down and specific reserve process, the sales price to unpaid balance has been approximately 61% and 57%. So it is a slight discount to the 67% that we’re carrying on there which I think is appropriate for the difference between holding the assets to liquidation versus selling essentially this claim on the asset, which is what the loan is, and letting someone else go through the process of foreclosure and realizing on the asset.

On slide nine we begin to present information on our home equity portfolio. It is well-diversified with strong scores and was all originated by our sales force. We have seen somewhat higher loss rates this quarter in this product as we expected but the fundamentals of the product continue to hold up.

And slide 10 details our mortgage banking portfolio. Performance of our own balance sheet product which is at the top left of the page at $282 million was stable for the quarter with non-accrual loans remaining essentially flat at $8.3 million. The majority of our concerns with the mortgage portfolio center on the lot loan product where non-accrual loans increased by $4.4 million and our construction perm or one-time close products where non-accrual loans increased by $3.2 million. Balances in these higher risk products did decline by $34 million for the quarter and our improved management processes for these business are having positive results.

I would summarize our credit discussion by saying that the environment for anything residential related continues to be challenged and will remain so for several quarters. We are taking aggressive action, including loan sales, additional workout resources, etc. to manage our exposure in these assets and believe that doing so is the most appropriate response until we see some signs that the environment is improving.

As James will discuss, our capital position continues to remain strong in spite of the losses we are taking to address this environment. James, I’d like to turn it over to you to discuss third quarter results.

James R. Gordon

Again welcome to everyone on the call. We reported a $25 million GAAP net loss for the quarter and a $22.6 million operating loss for the quarter largely driven by the higher credit related costs that Lynn mentioned. This includes both the higher provision for credit losses and higher non-interest expenses in areas affected by the challenging operating environment, namely loan collection, FDIC insurance and lower loan origination salary deferrals.

As Mack indicated our capital ratios remain strong. Our Tier One and total risk based regulatory capital ratios improved slightly this quarter as summarized on slide 11. We ended September with tangible book value per share assuming conversion of the preferred stock into common stock of $9.42. We are carefully examining opportunities to participate in Treasury’s TARP capital issuance and troubled asset purchase program. They look attractive on the surface, particularly the 5% preferred stock relative to other capital alternatives in the market.

During these unprecedented times, getting extra capital seems prudent as we move forward. Also, the regulatory agencies have competitive reductions in the risk waiting for Fannie Mae and Freddie Mac securities which total approximately $1.5 billion for us. The impact of this change would improve our Tier One and total capital ratios by approximately 15 basis points on a pro-forma basis when adopted.

During the quarter we made a decision to trade improved liquidities for net interest margin compression as the net interest margin declined 16 basis points to 3.08%. At this level we’re back within our previous margin range of 3.07% to 3.12% but we’re optimistic long term regarding the margin; it remains under considerable pressure in the near term.

The change in our funding mix, both customer funding and wholesale funding accounted for 10 basis points of the 16 basis point decline and an increase in the non-accrual interest reversal had an approximately three basis point impact as summarized on slide 12. Additionally, the carrying cost for existing non-performing assets was approximately seven basis points for the quarter excluding the impact of funding of the net charge offs year-to-date.

During the quarter we saw customers both retail and commercial begin to shift from money market and checking products as shown on slide 13 into higher yielding CD, giving the intense competitive deposit pricing surrounding CDs in the quarter. For a limited period at the end of the quarter we offered promotions at prevailing market rates for CDs to selectively capitalize on the environment and increase customer relationships. This resulted in the overall growth in CDs less than $100,000.

We have seen and expect to continue to see some benefits associated with the increases in FDIC insurance limits including our decision to opt in to the expanded FDIC insurance for non-interest bearing deposits. Also, we plan to begin participating in the [Cedars] program later this month. We continue to reduce our reliance on short term unsecured funding sources and are using the Federal Reserve programs as needed.

We’ve lengthened the term for wholesale funding and moved into some more expensive but more reliable sources while maintaining this stable liquidity sources at the Federal Reserve and Federal Home Loan Bank. Slide 14 summarizes our wholesale funding sources and maturities at the end of the quarter. We estimate our sources of excess secure liquidity to be approximately $4.7 billion and we remain within our internal policy limits.

Our holding company debt maturity to a minimal near term with over $200 million at the parent company which does not mature until 2033 and beyond, leaving us with no near term rollover risk to the debt capital market. Funding costs remain a challenge. We expect near term margin pressure to continue but not as much as we had this quarter.

Our fourth quarter 2008 margin will face pressure from actions by the Federal Reserve to reduce interest rate which puts near term pressure on our net interest margins as the timing of deposits, repricing lags with respect to the Fed cuts and also we’re nearing the floor on some deposit rates, continuing competition in pricing of customer funding as well as maturing interest rate swaps on our loan portfolio.

A few additional comments on our securities portfolio. We continue to limit our overall credit exposure within the securities portfolio. I’ll start with what we don’t have. We have no Fannie Mae or Freddie Mac equity or sub-debt. Our only direct exposure to Fannie Mae and Freddie Mac is through mortgage backed securities and senior debt. Our security portfolio has no CDOs and no trust preferreds. In fact, 99% of our securities portfolio is rated A or higher and we have less than $10 million in corporate bonds all rated A or better with $15 million in private label mortgage backed securities all AAA rated.

Our remaining equity holdings total less than $4 million after taking other than temporary impairment charges this quarter. Also during the quarter we terminated certain interest rate swaps with a problematic financial counter party with no material gain or loss to the company.

As expected, [inaudible] loans held for investment declined by $176 million with declines coming from the runoff of Florida indirect loans of approximately $55 million, loan sales, moving up loans to held-for-sale and related charge offs. In addition, we are continuing to shift the mix of loans from construction related loans to C&I and income producing properties. Our mortgage portfolio also does not include any option ARM.

Slide 15 summarizes non-interest income categories for the quarter. Over the last two quarters we’ve had good growth in customer fee income and wealth management income together which these two categories comprised over 70% of operating non-interest income. However, for the third quarter we did see declines at other areas including mortgage banking income and loss on the sale and write down of ORE [inaudible] as progress.

Our increase in non-interest expenses stems from the current environment reflecting higher loan collection, higher FDIC insurance premiums and lower loan origination salary deferrals. Non-interest expenses are summarized on slide 16. Compared with the third quarter last year, loan collection costs are up $3.4 million and FDIC insurance premiums are up $2.7 million. These two categories are 70% of the year-over-year increase in operating non-interest expenses. Given these expense challenges we are continuing our efforts to manage expenses going forward.

As announced last quarter we’ve started an efficiency improvement project and engaged a third party consulting group to assist us in developing our [product]. As we work through the challenges of the higher costs in the current environment we realize there’s more we can do to control expenses and must do that. With this project we’re honing in on opportunities to improve our customer experience and increase revenues and manage overall expenses.

So far we have initially developed over 100 top level hypotheses with emphasis on workflow, policy and procedures. Examples include back office branch operations, lending process redesign and centralized procurement functions. We have outstanding commitment across the organization for this project. We’re also extending this process through a grassroots effort looking for our employees to share their ideas as well. In terms of timing we are close to our initial phase one launch and expect to complete the opportunity sizing this quarter and expect to realize the benefits over the next 12 to 18 months.

Next, I would like to talk about our effective tax rate which has been very volatile this year since the non-deductible goodwill impairment from the first quarter was spread throughout 2008. While it could still vary quite a bit we’re expecting the fourth quarter 2008 effective tax rate to be below 30% and likely between 20% and 25%.

With that I’ll now it turn it back over to Mack for closing and other comments.

Mack I. Whittle, Jr.

This quarter’s actions are very consistent with those of last quarter. We’ve maintained our strong capital levels. We built our loan loss reserve. We’ve aggressively dealt with problem loans and we have an attractive franchise that we think has very good long term potential. We believe that we’re doing the right thing during these unprecedented times recognizing problem loans, dealing with them aggressively, keeping plenty of capital on hand, managing liquidity and keeping our focus on serving our customers.

All of us at The South Financial Group appreciate your support and with this I’d like to open it up for questions.

Mary Gentry

This is Mary. We’d ask that you limit your questions to one primary question plus one followup. If you have additional questions feel free to reenter the queue. We’re now ready for the question-and-answer session to begin.

Question-and-Answer Session

Operator

We invite analysts to participate in the question-and-answer session. (Operator Instructions) Your first question comes from Kevin Fitzsimmons – Sandler O’Neill & Partners L.P.

Kevin Fitzsimmons – Sandler O’Neill & Partners L.P.

I was wondering if first, you guys did bring up the TARP program and that looks attractive on the surface and you’re evaluating it but can you give us a little color on what your understanding is of your eligibility? I know everyone has to apply for it and then get approved but I would imagine at some point you’ve had discussions with the regulators and are slowly but steadily getting a feel for who’s in and who’s out. And I’ve heard rumblings that it’s based on CAMEL ratings and I just would, I think we would, it would be helpful to get some understanding on what your thinking is, what you’ve learned so far on eligibility. That’s number one.

And then number two, if you can go into, we saw the link quarter flows in deposits and how retail deposits really increased from prior quarter but more transaction based deposits declined and I’d be interested in what you saw happen post quarter end so far here in October.

James R. Gordon

I’ll take the capital question and let Chris Holmes address your question on the deposits floats. On the TARP program we have been in constant dialogue with the regulators over the last week or so after it was announced. In discussing, I think right now there is less known than more known about how they’re going to do the selection process but at this point we see no reason that we would not apply and that it wouldn’t be considered.

What we have heard in our overall discussions is that there’s not necessarily going to be a hard set of rules but more guidelines that they will look to in evaluating each bank on its own merit to qualify and receive the capital. And at this point we feel still it’s prudent to proceed with that process based on those discussions.

And again everything that we have heard is positive and we’ve heard nothing that would be to the contrary that we shouldn’t proceed with the application process from the regulators or anyone else at this point.

Kevin Fitzsimmons – Sandler O’Neill & Partners L.P.

James, is that something where assuming you were to get the capital, is that something where you’d envision just boosting those capital ratios and holding it as the cycle plays out or is it something that would lend itself to allow you to get more aggressive, to do more front loaded actions like you’re doing in this quarter?

James R. Gordon

I think all of those are good alternatives to boost the ratios and continue what we’re doing, being aggressive with credit. Obviously, they’re going to want you to continue to grow and make loans, they tell it’s one of the primary purposes for the program and as well as to look to opportunities in the marketplace to bolster on the deposit side through potential bank acquisitions of deposit franchises. I think all of those would be appropriate and prudent uses of the capital in not only our view of that but we would believe that the regulatory agencies and the Treasury would agree with those observations.

Christopher T. Holmes

Hey, Kevin, this is Chris. A couple of comments to your question on deposit flows since the end of the quarter. A little commentary, on non-interest bearing deposit flows since the ending of the quarter, they’ve been relatively stable. Actually, the first half of October up maybe just a little bit from where we were at the end of the quarter but not any sustained movement there. It’s been relatively flat for non-interest bearing.

We’ve seen some money market pressure. We had moves in the second half of the quarter that continues into October. A lot of that is because we had some specials that we ran earlier in the year and with those specials in we have the tendency to lose some of that money; you lose the rates down [inaudible]. We continue to see a little bit of that perhaps slowed some, slowed a little bit in October and then we continue to see strong demand on retail CDs. We haven’t been consistently pricing up there. We’ve been legally stable in our pricing.

And currently we started the money market specials this week so we’re doing some things on the money market balances and we had a one day, we were open on Columbus Day. We had a one day CD special on Columbus Day so those are the things they involved products that have affected our balances somewhat.

But outside of those, my comments earlier were outside of those couple of specials. Those are the specials that have done well that attract a few balances for us.

Operator

Your next question comes from Ken Zerbe – Morgan Stanley.

Ken Zerbe – Morgan Stanley

Hoping that you guys can just maybe give us your outlook in terms of future loan sales. Is this something that we should be seeing? You’re expecting $25 million, $50 million per quarter of construction loans being sold off or what’s your view there for the next couple quarters?

H. Lynn Harton.

Sure. This is Lynn; I’ll take that. We are preparing another loan sale for the fourth quarter. We think that’s the prudent thing to do. Now, I will say, I will have this one caveat. Part of the TARP program of course includes the asset purchase plan. Appropriately and correctly, as of right now the TARP program is focused on the capital piece which we do believe is attractive as we’ve mentioned. And so there’s not a lot of clarity around what the asset purchase part is going to be.

As we get further into the quarter and we get more clarity on that, we may decide to hold off on some loan sales and see what will happen with the government purchase program which we think because they’re taking a bit of longer term view might be at slightly better pricing but we’re really kind of going down a dual track process.

In other words we definitely believe loan sales are the way to go. The question is whether we do it private or whether we potentially wait and see how the government program shakes out.

Ken Zerbe – Morgan Stanley

I guess my one related followup on that is if you look at slide eight, how you mentioned that you’re reserving, you’ve already charged off reserves what, 33% against your resi construction loans? On future loans though, let’s assume you do go private. I would like to think that given what you’ve done, the really only major increase in your charge offs is going to be through rising non-accrual loans but I guess that might not actually work out so well in practice.

What’s the reason or why would, if we though sharply higher charge offs going forward on sales of resi construction loans, where would the difference be? Like versus you’ve already written it down by one-third, if that makes sense.

H. Lynn Harton

Yes. And so we’ve written them down to 67% and as I mentioned our sales prices are typically in the 57% to 61% so that would imply another 10% discount. And if you think about a purchase of a loan versus purchaser of the actual underlying asset, if they have to put into their calculation the process of going through foreclosure, how long is that going to take me, etc. so it’s natural to assume that when you sell a loan versus you liquidate the underlying asset, that you would take a little bit steeper discount.

Like I said, in our experience that’s coming out at about 10% which would be on that portfolio another $12 million to $13 million roughly; something in that neighborhood.

James R. Gordon

The other thing to think about too, Ken, if we sold the entire non-accrual portfolio that’s showing there at $0.67 you would have to flow through that $30 million of specific reserves through charge offs as well, which is part of what we talked about that contributed to the charge offs both on the loan sell and existing non-accruals. So it would elevate, even if we sold them at $0.67 it would elevate charge offs.

Now, whether we would need to provide back to cover that would all be dependent upon the rest of the portfolio and the inflows and changes in the overall credit mix.

Ken Zerbe – Morgan Stanley

Sorry for this one last followup but have you guys considered that though? Just basically saying, “Alright, we have $153 million of resi non-accruals. Let’s just sell the whole thing, take our hit and just be done with it.”

H. Lynn Harton

Again, we’re looking at loan sales constantly. We’re just on an account by account basis and going to continue to do it so at this point we’re not looking at selling the whole book because there are pieces. The other thing you do when you have a loan sale, you’re also giving away any chance that recovery down the road as well. You have to balance those two things.

James R. Gordon

And the other thing you have to balance too is some of these are nearing foreclosure and we believe that many of those will move forward through the foreclosure process in the coming quarter and end up in other real estate owned which is one step closer to getting it out the door. But loan buyers are reluctant to buy it at or near the foreclosure window.

Operator

Your next question comes from John Pancari – J.P. Morgan.

John Pancari – J.P. Morgan

Just regarding the loan sale question, are you looking at the options to sell loans via an auction process? I know other banks have been doing that and there’s companies that have facilitated that particularly in the Southeast earlier in the year and other banks are certainly doing it in other challenged markets. Is that an option as well that you’re doing at in terms of loan sales?

H. Lynn Harton

We’re going through a company that specializes in bringing buyers and sellers together versus a real auction online type process and we believe that’s been pretty beneficial. If you look at the individual loans that we’ve put in to sell this quarter, it’s approximately 18 or 19 loans we signed through our partner. We signed approximately 100 confidentiality agreements representing different buyers to look at those properties so we really believe we’re getting the right players to the table and a good number of players to look at the loans.

John Pancari – J.P. Morgan

Can you talk a little bit about your income producing portfolio? Where are you seeing the delinquencies rise there? Obviously, we’re seeing an uptick in your past dues and by which type of property are you really starting to see the weakness? Is it retail oriented strip malls for example?

H. Lynn Harton

The largest single increase was one $9 million credit that is a student housing project where the developer had some severe personal problems unrelated to any of our loans. The partnership that owns that property has that property under contract. It should close out the end of this quarter so that one is unrelated to any industry issues; it’s more of a personal situation. It’s the biggest feat.

Underneath that, what you’re seeing is again stuff that’s related to residential housing. You see some realtors in there, some individual investors that have maybe struck small strip centers, some retail, kind of more the mom and pop and they tended to also have side investments in residential real estate that’s carrying their overall personal situation down. So if I had to say anything from an industry trend, it would be A, anything related to residential real estate whether that’s real estate companies, title companies, etc., mortgage companies; so anything that has that as a tenant.

And then it’s also more concentrated at this point in the mom and pop smaller strip centers we’re receiving any increases but again, the increases are relatively small outside of that one large gun, specific situation.

John Pancari – J.P. Morgan

One last thing and this is a much higher level question but I think it needs to be asked. Just in light of the government’s efforts to ingest capital here into some of the healthier banks and certain markets, with some of your pure banks, larger banks specifically with access to cheaper capitals, some would argue that some of the larger players may be back on the acquisition hunt sooner than later. And if so, you could have a larger acquirer looking at your franchise. Is it something you’re considering at this point just given the willingness to pay from some of these larger acquirers in your markets?

Mack I. Whittle, Jr.

We’re always open to have discussions with anyone but in the near term we haven’t really heard from anybody. I think everybody’s got their own internal issues that they’re focused on as we speak. Now, who knows what the future will bring once everybody has gotten this additional capital in place?

Operator

Your next question comes from Adam Barkstrom – Sterne, Agee & Leach.

Adam Barkstrom – Sterne, Agee & Leach

Hey, Lynn, was curious if you could walk through, you talked about the loans held for sale I guess this quarter and those loans that were sold and you guys have touched on it a couple of times but just specifically, if you could walk through for this batch again what the additional writeoffs were for those that were already and loans held for sale, if that makes sense.

H. Lynn Harton

Not sure if I follow you, Adam. There weren’t any in held-for-sale prior to [inaudible].

Adam Barkstrom – Sterne, Agee & Leach

Let me ask you another way, you had a small bucket of loans that were held for sale that were then sold and you took the charge offs related to that this quarter or did I misunderstand that?

H. Lynn Harton

No, we didn’t have any that were, this is the first time and one of the reasons on slide five we outlined where they, which ones are in held-for-sale versus which ones have actually been consummated. And this is the first time we’ve had non-performing loans in our held-for-sale portfolio. In other words, so we’ve gone through as we mentioned, the bidding process. We’ve got real buyers; they’ve done due diligence, all those kind of things so it’s not a hoped-for-sale and it’s not a mark to a hoped-for price but it’s real prices with real buyers where we have not actually closed those sales. So we went ahead and wrote them down to those bid prices and put them in held-for-sale. Is that –

Adam Barkstrom – Sterne, Agee & Leach

I guess what I was getting at is what was the, on a percentage basis, what was the write down amount?

H. Lynn Harton

If you look on slide five there you can see the legal balance of $71.7 million and the sales price of $39.4 million so in total that was 55%, just the math that we realized. The sales price was 55% of the legal balance.

Adam Barkstrom – Sterne, Agee & Leach

Of the legal balance. But what was that balance prior to giving the sales?

James R. Gordon

That was the unpaid principal balance, Adam. The next column over was the pre-Q3 net charge off but also remember what Lynn said that approximately half of those that we put in that pending sale bucket column went straight through the process from accruing status to non-accrual and available for sale so that’s the reason that the third quarter charge off amount is higher than what you might believe other wise because it went straight through the process this quarter.

And initially on the third quarter charge offs included over $5 million of specific reserves prior to that that hadn’t been charged off. But primarily some of the loans sell bucket and some in the pending sale bucket so all of that distorts the actual loss for the quarter because much of that was provided for or arose during the quarter.

Adam Barkstrom – Sterne, Agee & Leach

And then, Lynn, I wonder if you are, if both of you could give a little bit more color on, you talk about, I guess a piece of it is this too but loans going directly from accrual status into this bucket which apparently you’re taking a 55%. I’m sorry, you’re getting or taking a 45% loss on. That just seems like a pretty dramatic valuation to go from accrual to a 45% loss.

H. Lynn Harton

They were not. They were loans that were going to go at some point to non-accrual. We’re not selling our best loans; we’re selling our worst loans and so as I looked forward to the fourth quarter and the first quarter, I don’t think anybody would expect the environment to get better so what I want to do is take some of that value risk off the table.

And so if we look at loans that today are performing because the guarantor is paying for them, they’ve got plans, they’re doing things that if we look at it and we say really this is one I’d rather be out of before it goes non-performing because it’s going to go there and I’d rather go ahead and take a steep discount to get out of it because of what I think is going on in the market, we think that’s the right thing to do.

James R. Gordon

Yes. And the other thing, most of if not all of the, have been in our watch process in going through the loan resolution process probably the first quarter if not before then so it’s not like they become problems in the quarter, they just hit the non-accrual or we pulled them forward before they hit non-accrual next quarter perhaps.

Adam Barkstrom – Sterne, Agee & Leach

Just one last thing. Hey, James, you mentioned early on in your commentary, I believe it was related to the change in the tax law related to Fannie and Freddie investments and you had a 15 basis point pickup in Tier One. Is that –

James R. Gordon

That’s not related to the tax code. They’re going to change the risk waiting from 20% to 10%. Basically, we’ve got $1.5 billion and if you go from 20% to 10% it’s going to reduce our risk weighted assets by roughly $150 million.

Operator

Your next question comes from Andrea Jao – Barclays Capital.

Andrea Jao – Barclays Capital

I have a question for James. As I look at the drivers for this quarter: net interest income, fee income, expenses; how should I think about this quarter as a base to grow off from? Specifically, and I think you’ve guessed this by now, specifically what kind of peak provision level is sustainable at this point? Because this quarter was a little depressed; this quarter was about $37 million. In past quarters you’ve done much more than that.

James R. Gordon

In the near term, because much of this is attributable to the environment. The margin was largely attributable to the environment. I think we showed last quarter that relatively moderate stress, that many of the things we’ve been working on for the last year on the funding side will help drive the margin upward. But in times like this and the turbulent times that we’ve seen over the last quarter with all the negative news and customer sentiment towards the banking industry, that makes that tougher.

Expenses, as we said most of that is related to the environment. As we move forward, until we get [inaudible] through the environment and get rid of some of those headwinds, you may not see significant improvement in that but beyond that, we think we can get back quickly to where we were and continue to focus on moving that forward on back to our core strategic objectives.

Just because of the environment, credit has moved up as a priority in the strategic objective obviously but growing non-interest income, maintaining the margin and improving the margin through better customer funding mixes and controlling expenses are, they were important a year ago and they’re more important today than they ever are for us to improve our longer term profitability.

Andrea Jao – Barclays Capital

So if I am interpreting you correctly, the pre-tax pre-provision income may be spaced closer to $37 million area in the near quarter but maybe by the back half of ’09 starts to ramp up to about $40 million?

James R. Gordon

Yes. I think as we begin to move out of this cycle and see more stabilization in the industry, which may come, that piece may come sooner before you see the improvement in the credits, that you could start to see some improvement and then as you move out of the credit cycle you should see better improvement around that.

Because you can’t be, the other side of that is you can’t talk out of both sides of your mouth; you can’t improve the liquidity and be aggressive on the loans without spending the money to collect the loans and sacrificing some of the margin to maintain and improve liquidity. And we’re committed to those two principals in this environment.

Andrea Jao – Barclays Capital

Then to just to change gears, just to gain shares, since you do plan to participate in the government’s capital purchase program, at this point if you can, could you give us an idea about your exit strategy?

James R. Gordon

Exit strategy once we get the capital, we get back out of the capital?

Andrea Jao – Barclays Capital

I mean because obviously the government is encouraging institutions to eventually replace the capital.

James R. Gordon

I don’t think any of us in the banking industry relishes the government being a long term shareholder and so we would work and we believe if we can improve our profitability to get past the environment and the environment has more confidence in the banking industry, we think being able to accept the capital in some other form would be feasible. It’s hard to say.

I think most likely to get the capital today from the government, someone in our shape would be, it could be three to five years before you would be able to get out from under that. Clearly, the target date would be to try to get out of it before it steps up to the 9% rate after the five years.

Operator

Your next question comes from Robert Patten – Morgan, Keegan, & Company, Inc.

Robert Patten – Morgan, Keegan, & Company, Inc.

Most of my questions have been asked. Just two thoughts. One, I do want you to give us more clarity on what’s going with the CEO search and how many candidates and so forth. The second question more back on credit is in the participation arena. Can you talk about what TSFG’s exposure is both in the performing and non-performing portfolios in terms of loan participation? I’m talking about the grading differences you’re seeing and what you guys are, we talked about last night, carrying loans at non-accrual; now the banks are carrying them at performing and how that complicates the issue of getting out of these things.

And the reason for the question is this: environment get uglier, participations are going to get uglier.

Mack I. Whittle, Jr.

I’ll take the CEO search. It is well underway. As I’ve said, Spencer Stuart has been hired. They’ve had several meetings with them. I think they’re in the long list phase of that so my guess is over the near term, the next couple weeks they will narrow that list down and hopefully we’ll begin having interviews sometime before Thanksgiving so that hopefully a decision can be made in early next year.

H. Lynn Harton

Bob, this is Lynn. On the participation piece, I don’t have those numbers accumulated now; I’ll be glad to follow back up with you and get them on an account-by-account basis. That is an issue on a few of our Florida real estate credits. We’re actually trying to swap out exposures with some participants so that we can control our own destiny. We like our own properties better than some we’re participating with, etc.

So I don’t have that. Again, I’ve got it on an account-by-account basis. I don’t have it accumulative, I’d be glad to follow up through Mary with that.

Robert Patten – Morgan, Keegan, & Company, Inc.

Lynn, any idea, is it in the $100 million range? Is it in the $75 million? Is it a six figure? I’m just trying to get an idea of exposure because I’m hearing more and more stories from different banks of problems as things get a little testy on the participation side and people are starting to take bigger hits in that arena.

H. Lynn Harton

In terms of our existing non-accruals?

Robert Patten – Morgan, Keegan, & Company, Inc.

Both. In the performing portfolios as well as the non-performing portfolio because I’m also hearing there’s a big difference on how banks are carrying grades of loans to the same company. One might be a non-accrual and one might be still performing. Are you seeing that also?

H. Lynn Harton

You can’t do that too, there are some instances particularly on the smaller banks. Shared national credits which would be three banks or more, $20 million or more; those loans have to all be carried at the same grade at least on once a year when the shared national credit exam is done and it was just completed. We haven’t got the final report; we’ve got the updated grades and our grades were very consistent with it.

But you do see that some on the smaller credits that would either have one or two participants potentially or be below the $20 million. So I wouldn’t say it’s a widespread problem but you see some of that. In terms of our non-accruals, it’s definitely not in the $100 million range as participation. It’d be a small piece of it, non-accruals that have participants.

Operator

Your next question comes from Jennifer Demba – Suntrust Robinson Humphrey.

Jennifer Demba – Suntrust Robinson Humphrey

Back on the loan sale topic, Lynn, I was wondering if you could give us some color around what kind of discounts you took to your legal loan amount on various types of properties within the loan sale you completed and the one you have pending? Homes versus lots versus land, etc.

H. Lynn Harton

Yes. I’m looking over the list. It ranges from a low, we’ve got a couple that were at, one at 34%, one at 35% and those are more, it would be what you would expect. Raw land, in order to, the further you are away from cash and the further you area away from the population centers, the worse your discount is so those particular properties were raw land, a future development kind of piece and those would be the numbers there.

As you get closer to finished properties, whether it’s condos, finished houses, we’ve got $0.72, $0.75 on those kind of properties, $0.75 on the [inaudible]. So if you have completed, that’s better. And then one commercial property at $0.91 so again it’s really all about residential and then where you are in the stage of converting to cash on residential that determines your discount.

Jennifer Demba – Suntrust Robinson Humphrey

And the sales price you listed in that table on page five of your presentation, does that include the sales commission to the broker?

H. Lynn Harton

Does that, James, or not?

James R. Gordon

Yes, I believe it does. It was only a couple hundred thousand though.

Operator

Your next question comes from Brian Roman – Robeco Investment Management.

Brian Roman – Robeco Investment Management

I’m looking at page 10 which is the mortgage banking portfolio. Meaningful increases in 30 to 90 day past due in a couple of categories, meaningful increases in non-accrual loans. Can you compare what you think the recovery rates on these loans are versus I think you’re saying, we’ve sort of bandied about on loan sales or eventual sales somewhere between $0.55 and $0.65 on the dollar?

H. Lynn Harton

Sure. On the construction perm pieces that are in non-accrual, most of those are actually in South and North Carolina. We’ve looked at potentially selling those but frankly we liked the properties. We think as we updated the values we believe holding those and liquidating those ourselves are the right numbers. Within the lot loan portfolio of $249 million, really the most problematic piece of that is a small subsection of $90 million that was originated through our mortgage channel instead of through our branch channel.

Brian Roman – Robeco Investment Management

These are located where by the way? The lot ones.

H. Lynn Harton

They would be in North Carolina, South Carolina and Florida roughly equal to our balance sheet in total.

Brian Roman – Robeco Investment Management

Balance sheet in total relative to residential construction and A&D or –

H. Lynn Harton

More in terms of total assets. And the majority of that $15 million was coming out of the mortgage channel where –

Brian Roman – Robeco Investment Management

Is this dirt by the way? To quote the guys from United Community Banks in Georgia; they call them dirt loans.

H. Lynn Harton

They are developed lots so you could call them dirt roads. They do have roads and amenities and those kinds of things.

Brian Roman – Robeco Investment Management

Curbs.

H. Lynn Harton

Curbs, gutters, pools.

Brian Roman – Robeco Investment Management

Utilities maybe?

H. Lynn Harton

That’s right. Those lot loans though, in a subsegment of that $90 million which is the majority of where all those non-accruals are, the non-accrual loans, $15 million we may look to sell those and the discounts there I would imagine would be similar to, a little better than raw land but not much. So we’re evaluating that.

Brian Roman – Robeco Investment Management

And the ALTA?

H. Lynn Harton

The ALTA is generally a pretty good product. It’s customer based, underwritten in house so at this point we’ve not looked at selling that portfolio. But again, as you look forward to the government purchase program, these are the kind of assets that they mention most frequently that they would look at. So to the extent they were attractive options for doing something with these in connection with that program we certainly would.

Brian Roman – Robeco Investment Management

So you might sell them at an accelerated discount if that were the price being offered?

H. Lynn Harton

Potentially.

Brian Roman – Robeco Investment Management

I have another question, following up on something Adam asked. I understand Mack is leaving the CEO role at the end of the year but given the problems with the company over the last couple of years, could you justify why he’s going to stay on the board?

Mack I. Whittle, Jr.

I have a three year term on the board and just plan on continuing to serve out that term.

Brian Roman – Robeco Investment Management

So in other words your prior track record with the company doesn’t bear on whether or not you’re going to have a managerial position?

Mack I. Whittle, Jr.

The shareholders elected me to the board for a term of three years and I’m going to serve out the wishes of the shareholders.

Brian Roman – Robeco Investment Management

And the board’s not going to terminate it early?

Mack I. Whittle, Jr.

That’s correct.

Operator

Your next question comes from Michael Rose – Raymond James.

Michael Rose – Raymond James

I was wondering if you could give us some color around the impact of future rate cuts here in the near term on the margin?

James R. Gordon

Obviously, we’ve been able to manage through those fairly well over the last several quarters but we are starting to get to some floors on some of the positive prices. If you’re paying 50 basis points on some of your lower end products it’s hard to cut it significantly so you will have some impact in that but we believe we can manage through those things, through the different channels that we had.

Our margins stayed stable through the 325 basis point cuts that we had had preceding this but as it continues down more and particularly on a rapid pace, if they were to cut another let’s say 50 at the end of the month so 100 basis points in one month, that obviously is a much tougher hurdle for anyone to face because you are nearing some of the floors on the deposit pricing and obviously CD pricing. To this point, over the cycle hasn’t been nearly responsive to rate cuts. They’re not significantly different today than they were a year ago before the rate cuts begin to happen.

Operator

Your next question comes from Jeff Davis – Wolf River Capital.

Jeff Davis – Wolf River Capital

Lynn, I know you’ve got a number of moving parts, some of which you may sell into the market but if we step back from potential sales, how does, just from a big picture standpoint, how does all of the asset, are we reaching a point where within a couple quarters, two or three quarters where the non-performers and the resi construction are going to run as high as they are in the charge offs?

We start to burn that number down if you will and assuming C&I doesn’t become materially impacted and owner occupied and income properties don’t become materially impacted that in the back half of next year that NPAs should be stable if not trending down and charge offs following a quarter or there or so later.

H. Lynn Harton

If you had, here’s to me the question. If you had asked me more at the beginning of September/end of August, my belief looking at early stage problems, looking at migration of watch list credit, seeing what was going on in the market particularly in Florida, I would have called for a peak in non-performers in the second quarter of next year, exactly as you described.

The unanswered question to me right now is I think in the last 30 days, again I think the TARP program is very positive. I think it’s well priced, it’s well positioned now at the right issue for the banking industry and I think it’s extremely positive for all of those reasons. I think though we dig through that very open public discussion process. I think there was an impact to confidence on the part of the consumer out there and this unanswered question is did that drive the situation a bit deeper and therefore longer or are we still, will we recover from that and be on the track that I thought we were on? And it’s just too early to tell what the impact of that was to me.

Jeff Davis – Wolf River Capital

And followup for James. I know you don’t have any debt at the parent company that’s rolling and liquidity at Sept. 30 cash balances look to be fairly high, over $100 million. So no liquidity issues I understand per se at the parent but in terms of the Carolina First declaring dividends to the parent, I know you’ve done $25 million or so year-to-date. Any restrictions on that going forward because of the loss you’ve incurred year-to-date or because of just regulators leaning on the capital levels at the bank?

James R. Gordon

Clearly, that would be problematic to do but remember, we count half of the $250 million we raised at the parent company to cover not only the parent company preferred dividend and any other cash flows, not counting on the dividend coming out of the bank until 2011. Now we would obviously hope that we could get it out the store then but we plan on the worst and not getting any out until 2011.

And we still have $40 million, $50 million of excess cash even above that that we could put down into the bank if we needed to for additional capital.

Jeff Davis – Wolf River Capital

So no cash issues at the parent for several years all else equal?

James R. Gordon

Yes. All else equal; that’s exactly right.

Operator

Your next question comes from Christopher Marinac – Fig Partners, LLC.

Christopher Marinac – Fig Partners, LLC

Mack, I was curious on, from a philosophical standpoint, the new CEO that comes in, do you want him or her to have a focus on the exact same markets you’re in today or is there a willingness or an openness in the board to change footprint particularly if you’re going to take TARP money and consider some deposit acquisitions?

Mack I. Whittle, Jr.

The board will deliver right of that. It depends on the candidate we bring on board but we feel like we’ve got a great footprint. We feel like we’re not represented from a deposit share standpoint as well as we should be in a number of footprints, so a number of those areas within the footprint. So there’s plenty of growth opportunities, organically and otherwise well within the footprint that we’re in.

Christopher Marinac – Fig Partners, LLC

And is Spencer Stuart considering anybody internally?

Mack I. Whittle, Jr.

Yes. There are a couple of candidates internally.

Christopher Marinac – Fig Partners, LLC

That’s still a real possibility?

Mack I. Whittle, Jr.

Yes. I think so. It’s early in the process.

Christopher Marinac – Fig Partners, LLC

Again, you may have said this earlier but is there a deadline on when you want to have a decision to us and the public?

Mack I. Whittle, Jr.

We had hoped to do something around the end of the year. It probably will run a little beyond that but as I mentioned in our remarks, we set up an operating council in the late spring/early summer of James, Lynn, Chris and myself to really begin functioning as a committee and now we’ve brought in this succession committee to be a part of that.

So we’ve got an organization set up that can run without a CEO at the head for a quarter or so.

Operator

Your next question comes from Mirsat Nikovic – Integrity Asset Management.

Mirsat Nikovic – Integrity Asset Management

Could you provide me with the dollar value of your exposure to retail shopping centers and strip centers?

H. Lynn Harton

Yes, I can but we might have to follow back up through Mary. I don’t have it right in front of me; we do have that.

Mirsat Nikovic – Integrity Asset Management

Do you have the percentage of a particular portfolio? Do you have that number?

H. Lynn Harton

The committed value, and this is from memory and we’ll follow back up with [inaudible] but the commitments are approximately $400 million which would include, and I don’t have the breakdown in front of me in terms of completed projects versus project under construction. It would be very heavily weighted to completed projects but the total of the two would be right around $400 million. I believe $409 million I believe.

Mirsat Nikovic – Integrity Asset Management

I think you said earlier that at this point you’ve seen some weakness in mom and pop strip centers. Is that correct? Anything you’d like to add?

H. Lynn Harton

Just a little; that’s correct.

Operator

Your next question comes from Jefferson Harralson – Keefe, Bruyette & Woods.

Jefferson Harralson – Keefe, Bruyette & Woods

I have a question for Lynn. When you guys were raising capital and determining how much capital to raise, I think in your mind anyway you had an idea of cumulative losses. Since then the losses have spiked and it seems like it’s gotten a little worse out there especially with your comment that maybe in the last 30 days you’re more worried about where the peak ends up. I guess over the last handful of months that you raised the capital, has your estimate or your thinking on cumulative losses changed?

H. Lynn Harton

Not at this point but, Jefferson, we are certainly looking at that. At this point we are running within the levels that we raise capital to that we had anticipated could happen. Now, so it is happening and so the fact that you raised, the fact that it could happen at this level and now it is, you would like for it to have been a little less than that, right? You would like to have a little more margin which is one of the reasons of course we’re looking at the TARP program.

We are continuing to look at our stress models and watching to see what happens but at this point we’re within those guidelines.

Operator

Your next question comes from Al Savastano – Fox-Pitt, Kelton, Inc.

Al Savastano – Fox-Pitt, Kelton, Inc.

Maybe for Lynn, if you could give me a little color on the construction portfolio in terms of severities in Florida versus North Carolina and South Carolina. You had no sales and it’s get about what you expect?

H. Lynn Harton

I’m having a hard time hearing a little of that, Al.

Al Savastano – Fox-Pitt, Kelton, Inc.

I’m sorry. I’ll repeat it. Do you have, well basically just looking for severities in the construction portfolio, differences between Florida, South Carolina and North Carolina.

H. Lynn Harton

In the severities, most of which we’re seeing, if you look at appraised values the difference, there’s a pretty significant difference in losses relative to appraised values in Florida versus South Carolina/North Carolina. In other words you’re seeing much more deterioration there. Plan to go to market this quarter and we’ll get a better feel.

All the indications we get are that we will get better pricing on North Carolina/South Carolina properties. In fact, one of our purchasers specifically wanted to participate in our Florida purchase because they wanted the opportunity to be included in South Carolina/North Carolina properties. So at this point I would say certainly it looks better than expectation but we’ll wait and see.

Al Savastano – Fox-Pitt, Kelton, Inc.

Can you maybe quantify a little bit? If Florida was $0.33 on the dollar for land, what would it be in North Carolina or a range?

H. Lynn Harton

I hate to speculate at this point but it certainly, it’d be safe to say it’s going to be better but I don’t want to speculate at this point.

Operator

Your last question comes from David Darst – FTN Midwest Securities Corp.

David Darst – FTN Midwest Securities Corp.

Could you give us an idea of how much loan runoff or balance sheet decline we might see in the fourth quarter and are you doing anything else to manage the balance sheet lower to attempt to maintain the current capital levels?

James R. Gordon

Well and Lynn can speak to this as well, remember the indirect portfolio on Florida is one of the big contributors along with the loan sells and the charge offs contributed to, and that’s where you see the period end down more with the averages; flatter towards for the quarter. We’ve pulled back and we’re not obviously pushing that. We’re still focusing on growing and looking at key relationships with customers from an overall but pulling away from the more problematic areas.

H. Lynn Harton

And strategically what we’ve been focused on and continue to focus on is moving out non-relationship credit which specifically would be the indirect lending and then also a fair amount, some amount at least of our large corporate where even though they’re in our footprint, our ability to really penetrate that relationship is probably not what would we would like to see. So both of those categories we’re trying to drive down.

We’re certainly trying to drive down land and construction and we would like to do income properties to what we would call institutional grade income properties and we’re doing some of that. There’s not a lot of activity going on in the market as you would expect so I don’t expect major growth on that but we are doing that and then we’re focused on, we would like to grow our core small business family owned business.

The net result of that I would say I was pleased with the period to period loan decline that we saw in the third quarter and if we executed and had the same kind of decline and then came out of the same categories like it did in third quarter in the fourth quarter, I would be happy.

Operator

At this time I’d like to turn the call back to Mr. Mack Whittle for closing comments.

Mack I. Whittle, Jr.

Again, I want to thank you for being a part of our call this morning and we appreciate your support of the company.

Mary Gentry

If we could just do the final prompt for the replay I think we’re set.

Operator

This concludes today’s conference call. Thank you for your participation on the call. To access the instant replay, you may dial toll free 800-234-8715 or internationally 402-220-9691. Again, thank you for your participation and you may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!