Pacific Capital Bancorp Q3 2008 Earnings Call Transcript

Nov.25.08 | About: Pacific Capital (PCBC)

Pacific Capital Bancorp (NASDAQ:PCBC)

Q3 2008 Earnings Call

November 21, 2008 11:00 am ET

Executives

Tony Rossi – Financial Relations Board

George Leis – President and Chief Executive Officer

Stephen Masterson – Chief Financial Officer

David Porter – Chief Credit Officer

Analysts

Aaron Deer -- Sandler O'Neill

Andrea Jao -- Barclays Capital

[Polly Sung] – JP Morgan

Julianna Balicka -- Keefe, Bruyette & Woods

Joe Hall -- Sandler O'Neill

Operator

At this time I would like to welcome everyone to the Pacific Capital Bancorp third quarter conference call. (Operator Instructions) I would now like to turn the call over to Mr. Tony Rossi of the Financial Relations Board.

Tony Rossi

Good morning everyone and thank you for joining us to discuss third quarter results with the management of Pacific Capital Bancorp. With us from management are George Leis, President and Chief Executive Officer, Stephen Masterson, Chief Financial Officer, and David Porter, Chief Credit Officer.

Management will provide a brief summary of the results and then open up the call to questions. During the course of the conference call, management may make forward-looking statements with respect to the financial condition, results of operation, and the business of Pacific Capital Bancorp.

These include statements that relate to or are dependent upon estimates or assumptions relating to the prospect of loan and deposit growth, credit quality trends, the health of the capital markets, the company’s de novo branching and acquisition efforts, the operating characteristics of the company’s income tax refund program and the economic conditions within its markets.

These forward-looking statements involve certain risks and uncertainties, many of which are beyond the company’s control. Forward-looking statements speak only as of the date they are made, and Pacific Capital Bancorp does not undertake any obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

At this time, I would now like to turn the call over to George Leis.

George Leis

Good morning and thank you all for joining us this morning. I’m going to provide a brief overview of the third quarter of 2008 and then I’ll turn the call over to Stephen Masterson, our Chief Financial Officer, who will review our financial results in more detail. Following Stephen’s remarks, I’ll conclude with a discussion of the outlook for the remainder of this year.

We recorded a loss of $1.03 per share in the third quarter. This was due to two items, a $22.1 million goodwill impairment charge, and a significant bid in our allowance – billed in our allowance for loan losses.

The goodwill impairment charge relates to the goodwill established from a variety of acquisitions over the past several years and subsequently allocated to our commercial banking segment. The charge followed our annual goodwill impairment analysis and was driven largely by the declining valuation within our peer group, resulting from the turmoil in the financial markets.

The second item that impacted our results this quarter was a $64 million provision for loan losses. Our asset quality actually remained fairly stable this quarter. As our non-performing assets to total assets only increased seven basis point, and net charge offs were much lower than last quarter. However, the outlook for the general economic condition and the impact on our loan portfolio changed considerably during the quarter.

The mounting evidence of a strong pullback in consumer spending and increasing vacancies in retail and office space throughout the country caused us to increase the quantitative factors portion of our allowance. As with most banks, we have a component in the allowance methodology that is intended to capture the uncertain financial markets and the general economy that represents probable loss in our portfolio not captured by other components of our model.

The increased allocation for qualitative factors this quarter looked at the credit deterioration that could materialize if economic conditions do not improve in the near future. As a result of the provision this quarter, we saw a significant increase in the qualitative factors portion of our allowance, which now comprises approximately 57% of our total allowance.

Another significant driver of the large provision this quarter was the higher historical loss rates that are now embedded in our model. As you may be aware, the loss rates in more recent quarters are given more weight in the allowance methodology. Due to the significant increase in charge offs over the past few quarters, this component of the model is now contributing a much higher dollar amount to our provision than we have seen in the past.

As a result of our significant reserve build this quarter, our allowance for loan losses now stands at 2.13% of total loans and 73% of non-performing loans. With these higher reserve levels, we believe we’re in a much stronger position to manage through a prolonged economic slowdown.

Moving on to other items of note, despite the turmoil in the financial markets, we are pleased with the stability of our core operation. We continue to see good lending opportunities, particularly in the commercial real estate portfolio, where our loans increased by $215 million during the quarter.

Part of this growth is attributable to the commercial construction loans migrating to permanent financing as the properties are completed and demonstrated stable cash flows. With conduits largely absent from the commercial real estate finance market, we are seeing less competition for these permanent financing opportunities.

This has enabled us to continue our relationship with borrowers that demonstrate they have stabilized property, strong cash flows, and ample cushion to continue their debt service, even in a weaker economy.

We also continued to make good progress on our deposit gathering initiatives. As you are all aware, the environment for deposit gathering has been extremely challenging for all banks over the past several quarters.

With interest rates at minimal levels for NOW and money market accounts, customers have been increasingly seeking higher yields for their deposits. In light of this trend, we have made the strategic decision to keep these customers at the bank by offering more aggressive CD pricing. While this decision will certainly raise the costs of deposits, we believe it provides a number of benefits that help offset this increase.

First, we maintain the customer relationships rather than seeing them leave our bank. This gives us the opportunity to continue to cross sell other products and services which has become a particular point of emphasis throughout our company. Second, the higher deposit levels enable us to reduce our reliance on wholesale funding sources. And third, with higher balance of stable CD deposits in place, we can reduce the amount of brokered CDs that we need to add each year to fund our RAL Program.

The aggressive pricing on CDs has also helped us attract new customers who are re-examining their banking relationships in light of the weakness at many financial institutions. As a result of this initiative, we’ve been able to keep our deposit base very stable during this very challenging period. And based on early trends in the fourth quarter, I think we are in a good position to generate some meaningful growth going forward.

Our initial focus on deposit gathering has been in the CD accounts, but we also have plans to implement more aggressive programs designed to increase our lower cost deposit balances starting in 2009.

Now I’d like to turn the call over to Stephen Masterson for further discussion of our third quarter results. Stephen.

Stephen Masterson

Thank you, George. In my summary, unless I otherwise state, I’ll speak to the results of the core bank, which exclude the impact of the RAL and RT programs.

The core bank’s net interest margin declined to 3.61% in the third quarter, from 3.74% in the second quarter. The decline is primarily due to the shift in deposit mix towards higher cost CDs as George just discussed.

Our non-interest income was $16.3 million in the third quarter of 2008, compared with $16.7 million last year. The decline was mostly attributable to an impairment loss on mortgage-backed securities of $797,000 offset by trading portfolio gains of $374,000.

We also had a decline in service charges and fees as balances and deposit accounts that typically generate NSF fees have declined year-over-year. This decline was partially offset by an increase in trust and investment advisory fees, although the decline in asset valuations certainly placed pressure on the revenue generating ability of our wealth management business.

Total non-interest expense was $76.2 million in the third quarter of 2008. Our non-interest expense was impacted by the following items. We had a $22.1 million charge for goodwill impairment, as George mentioned earlier in the call, and we had a $2.7 million reserve increase for off balance sheet commitments. If we excluded these items, our net interest expense for the core bank would have been $51.4 million, an increase of 4% from the $49.4 million we had last year.

Turning to the balance sheet, we are continuing with our plan to sell certain loans as part of our liquidity and balance sheet management strategies. At September 30, we had $145 million of loans held for sale, which were primarily residential mortgage loans. When these loans are included, our total loans were $5.87 billion at September 30, 2008, which represents an annualized growth rate of 12.3% from June 30, 2008.

Turning to total deposits, we had total deposits of $4.94 billion at September 30, 2008, compared to $4.64 billion at June 30, 2008. Our growth in CDs helped to offset sequential quarter declines in other deposit categories. Approximately $287 million in CD growth came from broker deposits, most of which will be utilized to fund the 2009 RAL program.

Turning to our asset quality, we recorded a provision for credit losses of $64 million in the third quarter. The components of the provision were as follows, $18.1 million covered the net charge offs in the quarter which included approximately $11 million in the commercial portfolios and approximately $4 million in the residential and home equity loans.

$9.8 million related to an increase in problem loans, and higher specific reserves against impaired loans. $14.1 million was added to the quantitative factors portion of the allowance to reflect higher historical loss rates. $25.7 million was added to the qualitative factors portion of the allowance to reflect deteriorating economic conditions and other items that George mentioned previously. And finally, we had $3.7 million in RAL recoveries during the third quarter, which resulted in a corresponding reduction of our provision expense.

Our non-performing assets increased to $171.6 million or 2.23% of total assets at September 30, from $161.8 million or 2.16% of total assets at June 30, 2008. The increase in non-performing assets is primarily attributable to several small construction loans that have moved to non-performing status.

I would like to give an update on the larger non-performing residential construction loans that we’ve discussed in prior quarters and prior conference calls. As we indicated on our last call, we have six relationships with total outstanding balances of approximately $100 million. Pursuant to our work out plans, we have received some pay downs during the third quarter and these six relationships now have total outstanding balances of approximately $90 million.

For those relationships where there are finished lots and units, sales activity has proceeded in line with our expectations and at the prices we expected. In addition, the underlying collateral value has remained stable throughout the quarter.

Our total delinquencies increased to $260 million or 4.55% of total loans at September 30, 2008, from $230 million or 4.05% of total loans at June 30. The increase was primarily attributable to the construction and land and residential mortgage portfolios.

As a result of the significant provision this quarter, our allowance for loan losses increased to 2.13% of total loans at September 30, up from 1.29% at June 30. This resulted in an increase of our coverage for non-performing loans to 73% at September 30, as compared to 46% at June 30.

While the third quarter financial results reduced our capital ratios, we are still above the low capitalized guidelines. At September 30, we had a Tier 1 ratio of 7.7% and a total capital ratio of 11.9%. While we believe our capital levels are adequate, we also believe that the TARP program represents a unique opportunity to raise additional capital on attractive terms.

Accordingly, we filed an application for the TARP program and we have received preliminary approval form the Treasury Department. We will be raising approximately $188 million through the sale of first stocks and warrants to the Treasury. On a pro forma basis, this capital infusion would have increased our Tier 1 ratio to approximately 12.1% and our total capital ratio to approximately 14.9% at September 30, 2008.

Now I’d like to provide a couple of brief comments about the RAL and RT programs. Our RAL and RT operating expenses were $3.2 million higher in the third quarter of 2008 than they were in the same period last year. The increase is due to higher bonus accruals for RAL personnel due to the strong performance that we had this year in our RAL programs, as well as a $2.8 million litigation accrual.

As I indicated earlier, we had $3.7 million in RAL recoveries during the third quarter. As a result of these collections, our loss rate for the 2008 program is now at 95 basis points, which compares to 230 basis points back in 2007.

I’ll now turn the call back over to George.

George Leis

Thank you, Stephen. I’d like to continue the discussion about the RAL and RT programs and give a status update for the 2009 season. The disruption in the credit markets has restricted the availability of funding for the 2009 RAL and RT season. As a result, we may not be able to establish a securitization vehicle that we typically utilize for a portion of the funding.

We’re currently in discussion with some institutions regarding a securitization, but there is no guarantee that it will materialize. Knowing that this could be an issue, we have had contingency plans in place for some time. One of the alternatives we have explored is a syndication program, and we are currently in the process of securing commitments from a number of institutions should we choose to go that direction. It is also possible that we may retain more RALs on our own balance sheet.

The amount of the funding that we line up, either through a securitization or through a syndication, will ultimately dictate how many RAL transactions we have in 2009. From a sheer consumer demand standpoint, our expectations are that we would at least see a volume that we had in 2008, if not more. But we may have to scale back the program to some extent if sufficient funding is not available.

When we have finalized our funding plan and we will make an announcement regarding our expectations for the 2009 RAL and RT volumes.

Moving to the core bank, going forward we expect to see a moderation of loan growth due to more caution on the part of our borrowers, a decline in interest margin due to restrictions and prevailing interest rates, as well as more aggressive CD pricing, and a downward trend in our expense levels.

Our key priorities will be further increasing our base of retail and commercial deposits, reducing our concentration in commercial real estate by placing more emphasis on growing our C&I portfolio, and finalizing the funding for the 2009 RAL and RT programs. Of course, our credit costs will have the largest impact on our level of profitability going forward, but given the significant increase in our loan loss reserve, we believe we are at a better position to manage through the prolonged economic downturn.

While the turmoil in the financial markets is creating challenges for our near-term financial performance, we are optimistic about the opportunities emerging to enhance our competitive position in our regional markets.

The dislocation in the financial services industry is creating opportunities to win new business relationships and add experienced commercial bankers and wealth management businesses that can help us further grow our franchise over the longer term. While we are being very cautious with our use of capital in the current environment, we intend to be aggressive in exploring our opportunities to invest in our franchise that will ultimately create a strong return for our shareholders.

We’d now be happy to address any questions that you might have. Stephen and I are joined on the call today by Dave Porter, our Chief Credit Officer. And operator, we are ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Aaron Deer – Sandler O’Neill.

Aaron Deer – Sandler O’Neill & Partners

I guess to begin I’d like to talk about the RAL program. First, given your current capital levels and funding, if you didn’t have any other access in terms of securitization or syndication, how much RAL business in terms of transactions could you handle with your balance sheet as it is now?

Stephen Masterson

In past years, Aaron, that’s a good question, this is Stephen Masterson, in past years we’ve had a securitization facility of $1.6 billion, and we’ve sold a total of $2.2 billion into that facility, mostly during February. If we were to cut that back last year we had about $6.8 billion in RAL loans, the funding we could carry on balance sheet would be about $4.5 billion to $5 billion.

Aaron Deer – Sandler O’Neill & Partners

And with the – if you were to go toward a syndication for the RALs, how might that impact the profitability of the business versus the securitization that you had in the past?

George Leis

Well I understand why you want to ask that question, but I can’t – it would be a little premature for me to provide that information right now, Aaron. It’s sort of a fluid situation and we’re looking at a whole bunch of possible scenarios so, I really don’t want to make any commitments or speculative comments on that until I’ve had the chance to finalize all the discussions we’re having. And we’ve committed to communicate that to you guys as soon as we know that, so that’s kind of the way we’re thinking about it right now.

Aaron Deer – Sandler O’Neill & Partners

That’s fair, and kind of along the same lines if I may, what have your folks in Washington said about the incoming administration and how it might affect the RAL, RT business?

George Leis

As we said in the past, Aaron, we have great intelligence and great relationships with the folks in Washington and you know what? I have nothing really to update you on. Nothing’s changed from our prior discussions about –

Stephen Masterson

Yes and, this is Stephen, we’ve talked in the past about the work we’ve done in Washington and we have met with Obama’s campaign, and talked with various constituents around Washington about the program. They understand the importance of the program. They understand the program much better today than they did yesterday through the education that we’ve done, and we feel like we’re in tune with what’s happening and we’ll continue to work with Washington as things progress.

George Leis

We’re very proud with the level of education and communication that we have provided all of the constituents in the RAL program, from Washington through the consumer groups. So that’s everything we know about Washington.

Aaron Deer – Sandler O’Neill & Partners

That’s very encouraging. And then lastly, you obviously had some very impressive CD growth in the quarter. I guess some of this probably came from, it looks like you’re offering like a 5% 60-month CD, I’m just wondering if that’s kind of some of the cost you’ve got on the funding side. What kind of yields are you getting on the asset side as you book new business?

David Porter

I think as Stephen may have mentioned, I think our net interest margin’s running about 3.61%.

George Leis

And Aaron when the Fed lowered its rate, we reduced the rate on our CD deposits, so we have a new – our newest CD campaign is priced at 4% going 4 for 24 months I believe is the slogan that we’re using out in the marketing world, so and I think as a point of reference, right now given the dislocation in the market, we want to grab as many clients away from the institutions that are distracted as we can.

And we’ll pay up for that with an intent to really take our retail infrastructure and cross sell other products and services to offset some of those higher costs in those deposits. But I’m very pleased. This is the first time that I can report that we’re growing our deposit base in the last several quarters; it's very encouraging for us. Stephen any other color you want to add?

Stephen Masterson

No I think that’s well said, and what you’ll see is you’ll see through the campaigns you’ll see increases in fee income as we cross sell and do things of that nature. So we’re very pleased with where our net interest margin is and where it’s headed.

Aaron Deer – Sandler O’Neill & Partners

But with the – can you give me a sense of what kind of pricing you are seeing on the asset side?

David Porter

I think Aaron, in this market with lenders kind of pulling away, I think we’re seeing more attractive pricing opportunities than we’ve seen otherwise. A lot of the commercial real estate conduits have now evaporated, and so we’re seeing some relatively good, attractive opportunities in a number of areas that I think we’re – because we can use our balance sheet – we’re going to see good pricing it.

Operator

Your next question is from Andrea Jao – Barclays Capital.

Andrea Jao – Barclays Capital

First regarding the credit quality, how much of a deterioration in the environment have you factored into your current restore levels?

David Porter

I think as you look at our provision build in the third quarter it's really divided into two pieces. About a third of it resulted from the addition due to historic loss rates and this is kind of formulaic in our model to pick up what happened in the second, or the first and second quarter from a loss standpoint.

About two thirds of the build, however, really focus around economic issues that we're seeing, both from a macro standpoint and within our footprint type issues. Things like increasing Cap rates on commercial real estate. The issues some of our middle market companies may be having with adjusting to slowing top line revenues. So it's, the qualitative factors I think are important to us now to make sure that we're getting ahead of the curve from the standpoint of a slowing economic environment.

George Leis

Andrea, as Dave and Stephen and I were talking about how the model is operating, we haven't seen the level of delinquency in our portfolio yet. And the thing that we were talking about is the middle market companies that we do business with have been really doing yeoman's work in doing everything they can, at least the companies I've talked to, in sort of reducing their expenses. And then sort of weathering a prolonged – weathering a recession.

But there's only so much that these guys can do and what we wanted to make sure we had in sort of building a fortress balance sheet, that any stress that we saw in that middle market segment we could weather because we believe the longer the recession sort of lasts, the greater the amount of stress that those middle market companies might experience and we just wanted to be prepared for it. That's the one thing that I think really – we want to be prepared. We want to be fortressed so that's one of the things – I think that's one of the areas that we were able to build in our qualitative factors in our model.

Andrea Jao – Barclays Capital

I guess the reason I want to hear more about do you think the recession's going to last 12 months, 18 months more and unemployment's going to continue to rise how much in your footprint, so that we can also watch the environment that you're in and make our best guess on whether you will still need to reserve even more to 2009? I guess that's kind of what we were trying to get at.

George Leis

If I had that crystal ball, Andrea, I'd let you know where we thought the recession's going to go. We're not sure, right? We hear on a macro level that things are going to be tough out there. We haven't seen it yet in our market and our market has been somewhat insulated given where we operate, but it's not immune from this. So I would imagine, Dave, as we look forward we might be cautiously building reserve going forward as we look at our commercial real estate portfolio and our C&I portfolio to see how it's performing. Right?

David Porter

That's a good point and we'll do that on a quarter-to-quarter basis as we go forward. We'll do that analysis. We're also taking into account, Andrea, how the portfolio, some of these portfolios have behaved in prior downturns and making sure that we're going to be adequately reserved to cover the performance that we saw in those periods.

George Leis

We've been – Dave, you've been pleased with the performance of our homeowner equity portfolio. I think our residential real estate portfolio's performing well compared to the rest of the country, but again – any comments that you want to make?

David Porter

No, it's been relatively stable. We're under 2% delinquencies in both those portfolios. Commercial real estate also has been relatively stable but I think we're just concerned about what we're hearing from a macro standpoint relative to the economy.

Stephen Masterson

Andrea, I'd add to that, as Dave mentioned, we will look at this quarter-to-quarter and as you know we will reserve for inherent probable losses and known losses in the portfolio as we go forward. And that's really what we've done this quarter. The ratios of 2.13% to total loans and 73% coverage on our non-performing loans, that represents the inherent probable and known losses in our portfolio to date.

And as we go forward we'll look at that quarter-to-quarter and we will do the same thing. Do we think it will go much, much higher? We'll assess that as we move forward, but 2.13% coverage is very sound at this point.

George Leis

Very strong.

Andrea Jao – Barclays Capital

Do you mind sharing with us your interest rate outlook and kind of your outlook on your net interest margin?

George Leis

We've been talking about this as a management team and you've seen what's happened in the market with the interest rates and the things that the Fed have done. LIBOR's gone down, various things of that nature. We've been pricing CDs and monitoring the market. We've talked in the past that we have a pretty elaborate pricing system for both our loans and for our deposits.

If we look back at history of this year we started the first quarter at 3.64% on our net interest margin. We moved to 3.74% in the second quarter and now we're at 3.61% for the third quarter and that really follows the trend of how we were pricing our deposit campaigns during the summer and obviously how we price our commercial and residential loans.

I would not expect the net interest margin to vary by more than a couple of basis points in either direction over the next quarter.

Andrea Jao – Barclays Capital

And last but not least, even if you will be able to do less RALs, do you think RT volumes will hold in or increase as the RALs that you cannot do are offered out as RTs?

George Leis

Andrea, that's a very, very question and it's one that I don't have an exact answer to but we would expect that if we do less RALs we would do more RTs. But there's a lot of factors that go into that. There's a lot of factors such as the tax preparers, the tax payers and what they want and what they need, but traditionally what we've seen is when someone does not qualify for a RAL they automatically move into an RT. And we assume that if a RAL is not available in February or March that they would opt for the RT.

So we do expect to see an increase in that but I can't give you a specific answer because there's too many variables that are moving at this point for me to really pin that down.

Operator

Your next question comes from John Pancari – JP Morgan.

[Polly Sung] – JP Morgan

I was just wondering if you could talk a little bit more about, in terms of credit other than resi construction, what other portfolios are you sort of watching carefully at this time or whether there's any deteriorating trends in other portfolios?

David Porter

We're really kind of keeping an eye on everything but we haven't seen, I think as we talked about in other quarters, the concentration of our problems continues to be in the homebuilder portfolio, and we're continuing to see that as the issue. We do have a small portfolio of about $100 million in small business that is not performing as well as we'd like, but I think that's consistent with what's happening in the industry with that type of a product.

Other than that the metrics, the trailing metrics on our other portfolios have held up relatively well.

George Leis

Dave, didn't we perform a stress test on three of our portfolios at the beginning of second quarter I think?

David Porter

Yes, we did and that was around commercial real estate, residential real estate and construction and land. And we did consider some deterioration in those portfolios already that was built into our allowance. We're continuing to monitor that though to see if there's any further deterioration that we need to take into account.

George Leis

Polly, the thing is, that I think we commented on, we have a very good middle market commercial banking business and like I told you, the thing that has been so admirable about those commercial banking clients has been their ability to do what it takes to survive a recession.

The issue and the concern that we have, concern that I have, and one of the things that we talked about in building our model is for a prolonged recession – puts some stress on those guys and we just want to be prepared for that. Although the portfolio is performing well right now we want to be prepared.

[Polly Sung] – JP Morgan

Are you going to share with us what your unallocated reserves are? I know you indicated a 57% for qualitative factors, but what portion of your reserves are unallocated at this point?

David Porter

We have no unallocated reserves.

[Polly Sung] – JP Morgan

Okay, so everything is allocated.

David Porter

Yes.

[Polly Sung] – JP Morgan

And lastly, I was just wondering if you guys would consider any bulk loan sales of like potential problem loans?

David Porter

We're always looking at options to deal with problem loans and we'll continue to do that.

George Leis

Dave, did we not – you were pleased with some of the performance we had in our non-performing loans.

David Porter

Yes, we have had property sales, not from a bulk loan standpoint but from an actual property sale standpoint that came in at the values that we were holding the loans at.

Operator

Your next question is from Julianna Balicka – Keefe, Bruyette & Woods.

Julianna Balicka -- Keefe, Bruyette & Woods

Congratulations on your TARP approval. I have several questions and the first one is more of a – I didn't quite catch the balances when you were talking about the homebuilder portfolio, the way it was last quarter versus this quarter?

David Porter

I think it was about $100 million of the six accounts that we talked about last quarter and I think we're down to about $90, $89 million in balances now.

Julianna Balicka -- Keefe, Bruyette & Woods

And then on the brokerage CDs at the end that you took on [inaudible] RAL program, what was that balance again?

David Porter

We brought on approximately $250 to $300 million. I think it was in brokered CDs during the quarter.

Julianna Balicka -- Keefe, Bruyette & Woods

And so if I look at the quarter balances of equality system, we're looking at a decrease on otherwise deposits?

Stephen Masterson

Well we had a net increase in deposits. A large portion of that was made up in brokered CDs as you've identified there but keep in mind what we talked about earlier. We talked about that the campaigns were two-fold. One was to keep current customers from going to other banks that were offering higher rates and we have done that very successfully.

And the second was to start to bring in new customers and we're seeing a lot more of that here in the fourth quarter than we may have seen numerically in the third quarter.

George Leis

Yes, I think you'll see the big growth probably happen in the beginning of the fourth quarter for us in the last couple of weeks. So again, we are very encouraged by the magnitude of that growth.

Julianna Balicka -- Keefe, Bruyette & Woods

Can you give us some numbers around what you've gained so far in the fourth quarter? I mean we're pretty far into the quarter.

Stephen Masterson

I would tell you, and I'm making some forward-looking comments now so don't hold me to these numbers because I don't have them in front of me and I certainly haven't audited them and had them audited, but we've seen a couple hundred million dollars of deposits come in in our retail commercial wealth management deposit campaigns in the last month and a half.

David Porter

The Wachovia, the Wells and that whole period where Wachovia Bank was sort of hanging out there was a very good period for our deposit growth. Wachovia has a large presence in our market and probably more than Countrywide or Indymac's failures, the Wachovia sort of hanging out there with Wells and Citibank sort of bidding for it resulted in some very nice deposit growth for us during that last period.

George Leis

Julianna, I also want to add to that. Broker deposits are interesting and we've always used them to fund our RAL program as you know, and as all of you who have followed our program know, and we do put on a sizeable amount of brokered CDs in the third and fourth quarter as we ramp up for the RAL season.

Now keep in mind, if we're going to build $500 million in brokered CDs to fund the RAL program, or some number, we can't put those all on at one time in December so we have to start building those in the third quarter and the fourth quarter and kind of bleed those into the balance sheet so that we don't hit it all at once and then we'll see those bleed off as we progress through the RAL season and as we get to the end of the RAL season.

So that is part of our strategy. We're not using the brokered CDs for the core bank. We're using those for the RAL business.

Julianna Balicka -- Keefe, Bruyette & Woods

In terms of the homebuilder $89 million balances, what is the reserve that is associated with those right now?

Stephen Masterson

On those specific accounts Julianna, those are all subject to FAS-114 analysis so we've written those down to fair value and once you do that you typically don't hold reserves against fair value accounts.

Julianna Balicka -- Keefe, Bruyette & Woods

All right. So when was the appraisal on those loans?

Stephen Masterson

I think the average date of the appraisals we have on those loans is mid to late second quarter.

Julianna Balicka -- Keefe, Bruyette & Woods

So could we possibly be looking at further write-downs in that book of $89 million?

David Porter

The recent activity on property sales that have come out of that book have been right at those values. All right? It's not to say future write-downs couldn't occur, but we're seeing values come in consistent with that carrying value.

George Leis

And Julianna I would also add to that. The complexity of our reserving methodology, or I should say the experience that we've had, that we've built into our reserving methodology, our qualitative factors. There's a lot of factors that make up those qualitative factors, such things as economic environment, collateral values, things of that nature.

Part of those collateral values are adjusted for the time that has been since recent appraisals so if we did see some decline in some of those properties it's quite likely that that would be covered by the qualitative factors related to collateral values that's already built into our model. It's a very complex model, very sophisticated model, and it's been reviewed by all of our advisors and it works very well.

Julianna Balicka -- Keefe, Bruyette & Woods

And last quarter a couple of them were still being valued on a cash flow basis. Has that changed or are all of those now at collateral?

David Porter

No, the ones that were being viewed as present value of future cash flows are still being valued that way.

Julianna Balicka -- Keefe, Bruyette & Woods

And did you write down any of them down this quarter?

David Porter

No we did not.

Julianna Balicka -- Keefe, Bruyette & Woods

And when was your last regulatory exam?

Stephen Masterson

We're in the middle of a regulator exam as I speak.

Julianna Balicka -- Keefe, Bruyette & Woods

And a follow-up please on the RAL program, when you said you've met with the Obama campaign and discussed and educated them on the RAL program what kind of concerns did they express and are still concerned about even after you've been able to explain to them this program?

George Leis

Julianna, again, what we have told you guys in the past still holds true today. I am impressed and encouraged by the level of communication that we have with all of the constituents in our RAL program. Nothing's changed. This year we were in early with both the McCain and the Obama team. We have two of the probably best lobbyists and analysts in Washington as our advisors, the Promontory Group with Gene Ludwig and [Ian Wise]. Washington counselors have been by our side plus our internal resources, which have been great.

The Vice Chairman that oversees that, Clay Larson, is on top of that so I have really nothing more to report on that to be quite honest. It's status quo as I'm happy to report.

George Leis

And Julianna it's a good question, but we talk internally every week about this. We get updates and with the election that's been going it's really been very quiet on this front.

Julianna Balicka -- Keefe, Bruyette & Woods

I have two quick questions on RAL and I'll step back. The $4.5 to $5 billion funding that you could potentially do on balance if all other methods fail, does that include your TARP capital or does your TARP capital funding change the game that you can now do more on balance sheet?

Stephen Masterson

The TARP program obviously helps us in a lot of regards. We want to use that TARP money for the purposes that it was intended and that is to continue lending in our marketplace, to continue the economic viability in our marketplace to strengthen our banking infrastructure. We didn't take the TARP money to increase our RAL program or to build our RAL program, but it certainly helps our capital ratios.

But once again, we go back to the statement that until we know what the funding programs look like and securitization programs look like, we're just not really in a position to say how it's going to turn out. But we will tell you as soon as we know.

Julianna Balicka -- Keefe, Bruyette & Woods

And then if you were to then do this $4.5 to $5 billion funding on balance sheet, let's just say the worst kind of – which is your worst scenario right now, what kind of funding are you looking at if it's going to be all on balance sheet? I know you can't talk about the syndication and I'm sure that it's for competitive reasons, but as far as funding on balance sheet, what kind of margins are we looking at, at this point?

Stephen Masterson

You know once again I really can't answer that at this time because the margins will be dependent upon vindications and securitizations that we're able to contract later this year.

George Leis

Yes, Julianna, we'll let you know as soon as we get that all –

Julianna Balicka -- Keefe, Bruyette & Woods

No, no, I know you will, I'm saying that let's just assume the worst case scenario which is that you're going to the balance sheet model, what kind of funding are you looking at if it's going to be on balance sheet?

Stephen Masterson

You know, it's basically our cost of funds, if you want to break it down to that, but I really can't give you that number at this point, because there's too many moving parts in that regard.

Operator

Your next question is from Joe Hall – Sandler O'Neill & Partners.

Joe Hall -- Sandler O'Neill & Partners

Do you have any plans at this point to raise additional capital outside the TARP?

Stephen Masterson

At this time, we do not have additional plans to raise capital outside the TARP.

Operator

Your next question is a follow up from Andrea Jao – Barclays Capital-

Andrea Jao -- Barclays Capital

I was hoping to get an update on your efforts to build relationships with independent tax preparers and how that's proceeding in this environment?

George Leis

Andrea, it's proceeding well, I think the head of our tax division has been out, just like he has been every tax season, working with both our large corporate relationships and the independent folks out in the marketplace so again, nothing new. There's plenty of activity in that market, there's plenty of volume, there's plenty of work to be had so [Rich Turner] and his team in San Diego have been operating status quo.

Andrea Jao -- Barclays Capital

As credit costs have come down from preceding years, one of the things that people have talked about is decreasing the cost of RALs. Do you see this happening next tax season?

Stephen Masterson

Andrea, that's something that we're looking at, we always look at. Once again on the RAL program I just don't have enough data right now to tell you that. It depends on our cost of funding quite honestly. I don't know that number yet because the syndications and securitizations just aren't complete yet.

Andrea Jao -- Barclays Capital

Understood, now, with respect to capital, could you give us more detail about how quickly you think you will be able to deploy the TARP capital and then eventually, if you can, what kind of exit strategy do you have for that capital?

Stephen Masterson

You know that's a very good question, Andrea, and we were notified yesterday of our approval of the TARP money. So we haven't gotten the money yet but it's on its way. We have to go through the process of filling out the remaining documentation after you get the approval notice to register to offer the preferred shares. So we have to do that and then we have to get the money in and as you know, the first nine banks that got the money, it took a good three to four months for them to even get the cash in the door so we expect to get the money by the end of December, by the end of the year as the government and the Treasury have said.

From there we will follow our strategy which is focused on our footprint, focused on our lending, focused on the things that the TARP was intended to do, which was to open back up the credit markets. An exit strategy is something we need to look at and strategize about. I'm just not in a position to tell you what that is at this point. We'd want to visit with our advisors and our investment bankers on that before we came to any conclusions on that.

George Leis

Andrea, I'm the one that actually talked to the Treasury Department and they want us to deploy the capital quickly, and I think we'll have it in 30 days, to be quite honest, I'm pretty confident about that. You know, Stephen, Dave, and I have had pretty good discussions with private equity companies across the country who have expressed very strong interest in our company, and that's something that we will look at as sort of the take out to that TARP money at some point down the future.

We're excited that we're received it. It really is a signal of the strength and the faith that the government has put in our bank as a survivor, and as one of the banks that is going to be a leader coming through this recession. So we're ecstatic about that. And I think you'll see us have a pretty robust strategy to take out that government capital as 2009 sort of unfolds, but we've already begun that discussion, to be quite honest.

Operator

Your next question is from Aaron Deer – Sandler O'Neill & Partners

Aaron Deer – Sandler O'Neill & Partners

Sorry to take up so much time, but just a couple of quick follow-ups. One is on the construction book, I was wondering if you could give a breakdown between residential and commercial, in footprint and out of footprint and then land versus vertical.

David Porter

Kind of the breakout between residential and commercial was probably about 45% residential, 55% commercial. Out of footprint versus in footprint, I think we determined about 120 million of the portfolio was out of footprint, and then the difference between land and vertical, I may have to get back to you on that.

Aaron Deer – Sandler O'Neill & Partners

Okay, and then lastly, can you just give the after tax impact of the good will impairment charge?

Stephen Masterson

After tax impact of the good will impairment charge was approximately $0.48.

Aaron Deer – Sandler O'Neill & Partners

I'm sorry, $0.48?

Stephen Masterson

Yes.

Operator

Ladies and gentlemen, we have time for one final question. That question is a follow-up question from Julianna Balicka – KBW.

Julianna Balicka -- Keefe, Bruyette & Woods

Thank you for taking my follow-up. My question is kind of regarding your loan growth expectations for ongoing loan growth expectations relative to what you commented on in regards to economic deterioration in your ramp up and reserve. So going forward do you expect a moderation in loan growth due to caution of borrowers at the same time you're going to be focusing on growing your commercial loan production?

At the same time you've noted that increased deterioration in economic conditions which presumably are kind of a negative aspect of C&I. So when you're looking at loan growth, what kind of loan growth are you looking at? Can we put some parameters about it? And also, what kind of normalized credit are you expecting within that?

David Porter

Julianna, this is Dave. I think from a loan growth standpoint I think we'll see growth going forward. I think it will be moderate relative to what we've seen this year. S if we have seen growth in the 12% annualized, we'll probably see that cut in half going forward maybe to 5 to 6% growth going forward.

George Leis

Julianna, as we expand our adjacent market strategy, and as we go after mature middle market companies, really credit isn't their primary need; that's sort of the difference as we move into our adjacent markets, as we grow our sort of commercial banking business, if you think about a model, it would sort of be like the old Mellon 1st Business Bank that we're trying to emulate here. And the beautiful thing about that model is credit is secondary to the cash management, the wealth management, and the deposit needs of those clients.

So we feel that we can grow that segment of our business and because of the type of client that we would be bringing on, their credit needs are modest. They are mature, low run companies, so if we do need to lend them money, we'll feel comfortable in that, but the benefit of going after that particular segment in our credit book, is that all of the other products that we bring on along with them.

Julianna Balicka – Keefe, Bruyette & Woods

Right, that makes sense, but do you have any thoughts about what normalized credit should and ought to look like? I mean your biggest pick up has been residential construction, but at this point, from the trends that you are seeing?

David Porter

Julianna, I think we've commented in the past that our targeted credit metrics are in kind of the range of having pass rates in the 95 to 97% pass rate. So we would be looking for accounts that would reflect that kind of credit profile and particularly in this economic environment. I think as we look at transactions we want to make sure we build in sufficient cushion to handle some uncertainties that might still be on the horizon relative to cash flow, revenues, debt service, collateral values, to make sure that we're stepping into something where there's an ability to handle some additional stress on the business model as it's presented today.

Julianna Balicka – Keefe, Bruyette & Woods

Okay, and finally, you mentioned a settlement of litigation, what was that?

George Leis

I'm sorry, I missed that question.

Julianna Balicka – Keefe, Bruyette & Woods

Settlement of litigation, you referenced?

Stephen Masterson

We have, and it has been disclosed in all of our Ks and our Qs, and we have several cases that are always ongoing. The one that we are referring to is one that is related to a cross collection case that's been ongoing for a couple of years, and it looks like we've received at least a preliminary settlement on that. So that's what it relates to.

George Leis

Yes, it's in our RAL business.

George Leis

Okay, I think that's it, operator. I just want to thank everyone for joining in our call and we look forward to speaking with everybody next quarter. Operator, thank you.

Operator

Thank you. This concludes today's conference. You may now disconnect.

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