Wilmington Trust Corporation Q2 2009 Earnings Call Transcript

Wilmington Trust Corporation (WL)

Q2 2009 Earnings Call

July 24, 2009 10:00 am ET

Executives

Ted T. Cecala - Chairman and Chief Executive Officer

Robert V. A. Harra, Jr. - President, COO, and Head of the Regional Banking

David R. Gibson - Chief Financial Officer

Bill North - Chief Credit Officer

William J. Farrell - Executive Vice President and Head of our Corporate Client Services

Ellen J. Roberts - Vice President, Investor Relations

Analysts

Mac Hodgson - SunTrust Robinson Humphrey

Steve Moss - Janney Montgomery Scott

Rob Rutschow – CLSA

David West - Davenport & Company

Andy Stapp - B. Riley & Company

Cheryl Pate - Morgan Stanley

Tom Alonso – Fox-Pitt Kelton

Presentation

Operator

Greetings and welcome to the Wilmington Trust second quarter 2008 earnings call. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions.) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ellen Roberts from Wilmington Trust. Thank you, Ms. Roberts, you may begin.

Ellen J. Roberts

Thank you. Good morning, everyone. Thanks for joining us. I want to remind you that the supporting materials for this call are available at our website on www.wilmingtontrust.com. As our operator said, the call is being recorded and the replay details are also on our website as well as in the earnings release.

Our agenda this morning features remarks from our Chairman and Chief Executive Officer, Ted Cecala. Also with us today are Bob Harra, who’s our President and Chief Operating Officer and Head of the Regional Banking business; our Chief Financial Officer, Dave Gibson; our Chief Credit Officer, Bill North; the Head of our Corporate Client Services business, Bill Farrell; and the Head of our Wealth Advisory Services business is not here but sorry about that I didn’t look around the room before I started reading.

We’ll start this morning with remarks from Mr. Cecala. At the conclusion of his comments, we’ll take questions. I want to remind you that news reporters may be attending and everyone is permitted to ask questions.

And now I have to give you our forward-looking statement disclaimer. This release may contain forward-looking statements that reflect our current expectations about our performance. Our ability to achieve the results reflected in these statements could be affected adversely by, among other things, changes in national or regional economic conditions, changes in market interest rates, fluctuations in equity or fixed income market, higher than expected credit losses, changes in the market values of securities in our investment portfolio, and other factors described in the disclosure documents we filed publicly from time to time.

With that, I’ll turn it over to Ted.

Ted T. Cecala

Thanks, Ellen, and good morning. Thank you for joining us for this discussion of our results for the second quarter of 2009. I hope you’ve had a chance to review our earnings release. I don’t plan to repeat everything that’s in the release but will speak to the significant items for the quarter and afterward we’ll respond to questions that you may have.

As we reported in the release, we recorded a net loss for the quarter of $9 million. This was due in large part to the $23 million charge for other than temporary impairment, or OTTI, as it is generally referred to. If we look at it on an operating basis, we would have had earnings of $9 million. In addition, earnings were affected by the provision for loan losses of $54 million which reflected higher charge-offs, increases in nonperforming loans, and downgrades in internal risk ratings.

On the positive side, the net interest margin rose 25 basis points to 316 as we benefited from lower funding costs. The performance of our corporate client services and wealth advisory services businesses continue to be good despite the difficult economic environment and continued market volatility. Excluding the special deposit insurance assessment leveed by the FDIC, our expenses were lower than the first quarter. And I will talk about each of these areas in more detail over the course of this call.

In my discussion today, my performance comparisons will be against the 2009 first quarter. I believe this perspective will provide a clearer understanding of how our company is responding to the challenges and opportunities that we see today rather than comparing against the year ago information.

I’d like to begin by discussing the regional banking business. For the quarter, average loans declined $123 million or 1%. Commercial loans in total were about the same, as lower balances in commercial, financial, and agricultural loans were offset by commercial mortgages. We are seeing opportunities to offer mortgages for owner-occupied properties as traditional sources of takeout financing, essentially insurance companies and the like, have been absent from the market. In the consumer portfolio, we experienced lower volumes of indirect automobile loans. Automobile financing was responsible for most of the decline in the consumer area as total the consumer loans on average were down about $130 million. Many of you will notice that the June 30 balance sheet reflects a decline in residential mortgages outstanding that is not apparent in the average balances. This is due to the sale of about $130 million of conforming residential mortgages at the end of the quarter; thus, the difference between the average and period end balance. Core deposit growth has been strong up almost $700 million or 12% from last quarter. This solid growth is coming from all of our business lines; that includes regional banking, wealth advisory services, and corporate client services.

Now, I’d like to spend a few minutes discussing credit quality. While the Mid-Atlantic region has generally fared better than most other parts of the country, it is not immune from the effects of the economic downturn. We believe the current conditions in this region are stable but fragile. For us, it is very difficult to predict the pace of recovery as we witnessed many of our borrowers remaining under pressure in this part of the cycle.

As we noted in the pre-announcement, the provision was $54 million reflecting higher charge-offs, increases in nonperforming loans, and downgrades in internal risk ratings. The reserve increased $18 million to $185 million and the reserve-to-loan ratio rose by 25 basis points to just over 2% and non-accruing loans rose to $68 million. There are three credits that made up most of that increase. They include a Delaware developer focused primarily on retail shopping centers, that was about $37 million; a Mid-Atlantic developer of retirement communities that has been affected by slowing sales, that’s about $21 million, and this is a premier provider of continuing care communities that has been affected by potential clients’ inability to sell their existing homes, essentially people need to sell their homes in order to move into these communities; and the last was a multi-franchise automobile dealer, selling both General Motors and import vehicles, which was about $20 million.

Other real estate owned also increased $8 million during the quarter. The largest portion of the increase was one development in central Delaware. This project is a single and multi-family residential project on which most of the site work is complete. Other OREO (ph) activity during the quarter included almost $3 million of real estate sales at a loss of just over $100,000. All of these sales involved residential real estate, both lots and houses, across multiple projects in Delaware, Maryland, and Pennsylvania. Loans past due 90 days or more declined $3 million or 9% and consumer credit showed the largest decline.

Now turning to charge-offs, net charge-offs rose $15 million to $36 million. That goes to correspond to a quarterly charge-off rate of 39 basis points up from 22 basis points last quarter. Commercial net charge-offs rose $18 million, while consumer charge-offs decline by $3 million. Within the commercial portfolio, commercial construction credits made up the majority of the charge-off increase. In total, five credits comprised over 80% of the commercial charge-offs, including the three previously mentioned loans that were moved to non-accruing status. In contrast, consumer credit charge-offs declined for the second quarter in a row. Most consumer categories showed lower charge-offs; indirect auto lending was responsible for most of the reduction.

To wrap-up my remarks on the banking business, I’d like to turn to the net interest margin. The margin was 316, up 25 basis points from last quarter’s 291, and in line with our guidance. The improvement was due to lower borrowing costs, both on core deposit products as well as on external funding sources. Remember, our balance sheet is inherently asset sensitive. We typically see the effects of rate changes quickly on our loan yields as we did in the first quarter, but our funding typically takes 90 to 120 days to adjust. That adjustment process was essentially completed in the second quarter. Given the current environment, we don’t expect our margins to vary significantly.

Before turning to expenses in our advisory businesses, I would like to take a minute to talk about the OTTI charge we recognized this quarter. We adopted the new FSP on OTTI accounting during the quarter. At the end of the quarter, our investment portfolio included 38 pooled trust preferreds and nine single issue securities. Of these securities, 21 of the pooled trust preferreds were determined to be OTTI resulting in a total write down of $68 million. Of this amount, $23 million was determined to be credit related and was recorded as a loss through the P&L. The remaining amount was recorded in other comprehensive income and reduced stockholders equity by $28 million after tax. The irony of this complex accounting associated with these securities is that $12 million of the $23 million was already recorded as a P&L charge in the fourth quarter of 2008. The performance of these securities continues to be affected by the current recession and obviously, we felt the impact of that this quarter.

Now, I’d like to talk briefly about expenses before turning to our advisory businesses. Excluding the $5 million special assessment leveed by the FDIC, total expenses were down about $3.5 million or about 3% from last quarter. As we look at our expenses, our largest expense category is people. At the end of the second quarter, total full-time equivalent staff members were down 36 from the end of the first quarter. About half of this decline reflected the first quarter closure of the collateralized debt obligation and conduit services business. The balance represents open decisions that we have elected not to fill. While incentive expense increased compared to the first quarter, it was more in line with prior periods as the first quarter reflected some true-up adjustments related to 2008 payments. We continue to be diligent in managing operating expenses and believe that the current level of the expense is sustainable going forward and by that I mean excluding the amount of the FDIC special assessment.

Now, I’d like to move over to the advisory businesses. As I mentioned at the beginning of today’s call, our Corporate Client Services and Wealth Advisory Services businesses continue to perform well in a difficult environment. In the wealth advisory business, revenue declined about $2.5 million dollars or 5% for the quarter. The strength of our business development has been masked by market volatility and a shift in client preferences for cash management and fixed income investments. These investments have lower fees than other investment alternatives. This makes it difficult to see the benefit of new business development. Concurrently, low money market mutual fund yields have reduced management fees we earn on the money funds because we have opted to waive fees in accordance with fund’s voluntary waiver and reimbursement provisions.

Now, I’d like to turn to Corporate Client Services. Corporate Client Services revenue increased $2 million or 5% from last quarter. The second quarter marked the third consecutive quarter of record sales activity. All areas posted increases except for investment and cash management services, which declined slightly. Capital markets showed the largest increase, rising 11% on the strength of the successor loan agency business and bankruptcy and default administration services. This growth is from the successful repositioning of the business to serve the needs of companies that find themselves in distressed circumstances. In addition, this group finds itself uniquely positioned to take on business from other larger firms that find that they have conflicts of interest as they work with troubled clients. As we remind everyone from time to time with our press releases, we have no low exposure or ownership interest in any of the associated assets in these transactions. Again, because we have no conflict of interest, we are able to distinguish ourselves from other firms.

During the second quarter, we were appointed to the Creditors Committee for five major bankruptcies and that included General Motors and General Growth Properties.

Retirement services included revenue degenerated from the 2008 acquisitions and rose 3% in the second quarter. New business development has offset the market volatility again there are some fees that we earn in that business associated with equity values which were lower than they were a year ago.

In entity management, our European business continues to obtain new securitization deals and they were able to convert opportunities associated with distressed transactions. Some of the strength in Europe has been diluted due to fluctuations in currency exchange rates, since most of the transactions are in pounds or euros.

To close out the fee revenue discussion, you may have noticed the jump in fees associated with Cramer Rosenthal McGlynn. These are… this is the recognition of hedge fund performance fees.

Now, I would like to turn to capital and then I’ll wrap it up and take your questions. We continued to take steps to ensure that our capital levels are appropriate to support our businesses. We are committed to ensuring that the Company continues to be well capitalized. As you have seen in this release, we reduced our quarterly cash dividend to $0.01 per share per quarter. This was a difficult decision but it is one that stems from our desire to act with an abundance of caution during this period of economic uncertainty. While conditions seemed to have stabilized, improvement has not occurred as rapidly as we had anticipated at the end of the first quarter. This action will preserve capital and help us to hasten our exit from the CPP. In addition, we are actively managing the balance sheet. As I noted in my regional banking comments, we sold about $130 million of loans from the residential mortgage portfolio at the end of the quarter. Compared to year end 2008 viewed on a period-end basis, we have reduced the size of our balance sheet by $1.2 billion dollars. This benefits our capital ratios by reducing the asset side of the capital adequacy calculations. As a result, our capital ratios continue to exceed well capitalized levels including and excluding the CPP funds received in December 2008.

To wrap up, we continue to see a stable… a stabilizing but fragile economy in the Mid-Atlantic region. Our advisory businesses are holding up well and we are managing expenses in this difficult environment.

That will conclude my prepared remarks. I thank everyone for attending today’s call and with that; I’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, at this time, we will be conducting a question and answer session. (Operator Instructions.) Our first question today comes from the line of Mac Hodgson with SunTrust Robinson Humphrey. Please proceed with your question.

Mac Hodgson – SunTrust Robinson Humphrey

Hi. Good morning.

Ted T. Cecala

Good morning.

Mac Hodgson – SunTrust Robinson Humphrey

Ted, you referenced the decline in the balance sheet over the last year or so. Is there opportunity to continue that decline or do you envision it staying fairly stable from here?

Ted T. Cecala

Well, obviously loan demand has not been at the level it had been a year ago. We continue to see a run-off in direct automobile portfolio and obviously commercial demand has been somewhat weak. So it could stay close to where it is or drift a little lower.

Mac Hodgson – SunTrust Robinson Humphrey

Okay, great. Thanks. And I think you referenced to the decline and I mean in the decline and losses in the consumer book, do you think that is an aberration or do you expect maybe… why do you think there is improvement there? And then kind of what’s the outlook for consumer losses given the rising unemployment.

Ted T. Cecala

I’ll move that over to Bill North.

Bill North

Hi, Mac. We’ve got a couple of quarters now where we’ve seen a little improvement in the loss side of things. And I think… but we're hopeful…we will tell over the next couple of quarters. I think what we are hopeful is, as I think we've talked about in earlier calls back in the middle part of ’07 especially with indirect portfolio, we kind of looked at it and retooled our offering with the goal of being to make sure we got the quality of indirect paper that we truly wanted. And what’s kind of happened over the subsequent quarters is, of course, that post mid-07 vintage paper becomes a bigger and bigger percentage of the remaining portfolio. And I think we’ll see. We’ll see in the next quart and the quarter after but I think we might be seeing the fact that that higher quality and better performing vintages of post ’07 loans is performing as we expect which means higher quality and lower losses. So, it is a little tough to predict… project the future. But I think what we are seeing after a couple of quarters is something we would hope to see a continuation of as we go forward on the consumer side.

Mac Hodgson – SunTrust Robinson Humphrey

Okay, great. And just maybe last kind of questions on capital. Have you performed stress tests on the portfolio? If so, what were the results? And then what are your thoughts about the timing of the initial repayment of TARP?

David R. Gibson

Mac, this is Dave Gibson. How are you? We have performed stress tests. We have not published those in dollar terms, but we believe that in our internal severe case that we remain well capitalized in all those stress scenarios. As to the timing of the repayment of the CPP, I think that we have no definitive schedule for that. Obviously, I think it is dependent upon showing stability in the nonperforming categories of our balance sheet and the continued improvement in our capital ratios.

Ted T. Cecala

As well as the economy. Obviously, we want to be prudent about this and make sure that you don’t sit there and write a big check and all of a sudden the economy instead of improving hits south again. So we just want to be cautious about that.

Mac Hodgson – SunTrust Robinson Humphrey

Okay. Great. Thanks.

Operator

Thank you. Our next question comes from the line of Steve Moss with Janney Montgomery Scott. Please proceed with your question.

Steve Moss – Janney Montgomery Scott

Good morning.

Ted T. Cecala

Good morning, Steve.

Steve Moss – Janney Montgomery Scott

I just want to start off; I was wondering what is the mix of watch list and substandard loans?

David R. Gibson

Watch list credits are about 6%of our portfolio and substandard are 7.2% of our portfolio.

Steve Moss – Janney Montgomery Scott

I’m sorry. What is the loan mix within the watch list in substandard loans, if you’ve got.

David R. Gibson

Oh, between loan categories?

Steve Moss – Janney Montgomery Scott

Yes.

David R. Gibson

I apologize. I don’t have that sitting in front of me.

Bill North

This is Bill North, Steve. We don’t have the finite number. I will tell you there is a heavier flavor that is going to be related to residential real estate construction situations than anything. Obviously, there is a little bit of everything in there, given the environment, but residential construction is going to have the biggest share of that.

Steve Moss – Janney Montgomery Scott

Okay. And I was also wondering how much do you have as of June 30^th in regard to auto floor plan and auto dealership loans? And was there any impact or what impact have you seen on your borrowers with regard to the franchise closings?

Ted T. Cecala

That number continues to trend down as dealerships carry lower inventories on the Chrysler and GM bankruptcy period. Today, our total dealer sales portfolio is about $400 million. About $370 of that is to auto dealers. I would tell you that the Dear John letters that went out from Chrysler and GM for us were… and our clients were pretty much a non-event. We had two Chrysler Jeep Dodge… one was a standalone Chrysler dealership that did not fully plan its inventory. So that was not non-event, they didn’t borrow. The other one had two other Chrysler Jeep Dodge franchises and the one that was affected, and they expected it, was a Jeep dealership that was dual (ph) on the location with a Nissan franchise. So they just took the inventory and put it in the other Chrysler Jeep Dodge locations and that was it on the Chrysler side. On the GM side, we have one very, very small dealer that we just have a nominal amount of new floor plan financing and they’re working that down through selling the inventory. So, the Dear John letters really have not affected our clients in any type of meaningful way.

Steve Moss – Janney Montgomery Scott

Okay. Good. Then lastly, any thoughts of loan sales with regard to construction loans or commercial loans? Obviously, you did residential mortgages this quarter… last quarter?

Ted T. Cecala

Yes, we haven’t pursued that path. Obviously, there are plenty of folks that would love to talk to us about it. Not that we don’t have some conversations. But we… historically, we try to find the best folks at these middle-market companies and we try to work with them when times aren’t quite as good as we like. Historically, that’s worked out the best for us. It might mean that along the way we are carrying a bigger pile of nonperforming assets and some. But usually at the end of the day, if we work through them and we get the clients to work with us, which of course having the recourse to debt helps to align those interest, it usually is the best combination for us. So never say never. It doesn’t mean we wouldn’t ever consider that, but at the moment, that is not anything that is on our agenda.

Steve Moss – Janney Montgomery Scott

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of Rob Rutschow with CLSA. Please proceed with your question.

Rob Rutschow – CLSA

Good morning.

Ted T. Cecala

Good morning.

Rob Rutschow – CLSA

I want to ask first about a couple of balance sheet trends. First on the deposit side, you’ve shown pretty tremendous growth in the noninterest-bearing deposits and the interest-bearing demand on a sequential quarter basis. I’m wondering if you can talk about what you’re doing differently there or what sort of market trends are leading to that kind of growth.

David R. Gibson

Rob, this is David Gibson. How are you? I think we have seen really contributions from all of our business lines. We have seen obviously the traditional consumer balances grow as… frankly alternatives that they have available to them in money funds and yields are frankly not that attractive and there is some flight to quality in terms of FDIC insurance. I think our corporate client services business continues to add… Ted talked about their sales volumes seeing record numbers. We also have seen a tremendous amount of deposits that come from some of those transactions. That could be in a variety of forms, whether it is escrow balances or just transactional cash that’s part of distress situations. So that has impacted those two lines you specifically addressed. Our wealth advisory clients, we introduced a new suite opportunities for them that leverage the FDIC insurance and that’s helped continue to grow deposits as well. So, it’s really across the board that we've seen good growth in our deposits. I will say the CCSI can be a little bit more volatile and that there are… we have opportunities where we see… it’s not unusual to see several hundred million dollars involved in transactions. If you compare our ending balances to our averages, sometimes you’ll see that and I think this quarter, our ending balances were slightly higher than average. I think that’s the result of those transactions.

Rob Rutschow – CLSA

Okay. On the loan side, it looks like you are still showing a little bit of growth in the construction and CRE portfolios; I know you talked a little bit about making loans to those companies that were previously funded by insurance companies. So I’m wondering if you maybe could segment the loan growth between that and what you’re seeing migrate from construction into the CRE portfolio? And then I guess who your or what types of projects you are funding on the construction side?

Ted T. Cecala

Rob, I’ll see if I got all that. I will tell you that it is really a combination largely of any growth opportunity in income property projects for the investor developers where it’s going to be grown or occupied buildings that house the CF&A clients that we have relationships with. And as we've said before and as you mentioned, a lot of this stuff is sticking around with us because it doesn’t have the permanent market alternatives that it did in the good old days. And of course, when that market comes back and at some point it will, we’ll probably see the run off of some of those loans because the terms and conditions of pricing that we require are probably not going to be as attractive as what they’ll find in the permanent market.

On the residential side, in that construction line item, we have not seen growth. We are not actively pursuing new opportunities there and really haven’t been probably for last couple months or so.

So anything you see is going to be income property or owner occupied driven. The income property side is going to be a mixed between retail, some office, a little bit of industrial. It is going to be for our clients that we think are at the top of the tier in terms of the sponsorship they bring and the profile of credit. It’s going to be something… it’s going to have to have the adequate leasing in place and again, the good solid sponsorship from those that are behind the projects. So I’m not sure if I touched on all of your bases or not, but if not, tell me what I missed?

Rob Rutschow – CLSA

Okay. No, that’s helpful. I guess I also wanted to ask about the credit. Can you talk about what the loss severity has been on the loans that have moved into the MPAs, I guess particularly the five that you highlighted as the primary drivers of the increase, and how that’s changed versus last quarter, a year ago?

Ted T. Cecala

Yes, I think I have your question. I mean… well actually, why don’t you rephrase that and ask it again, if you wouldn’t mind, Rob?

Rob Rutschow – CLSA

Okay. I mean basically I’m wondering if loss severity has gotten worse or if it’s the same over the last several quarters and where that… how much are you writing down these loans that you are moving into nonperforming?

Ted T. Cecala

To date, while we have charged things down to kind of right size values, we haven’t seen any change or I’d say a marked increase in terms of the “losses” that that we realized. And nor do I think we’ve seen any pattern of things that fall into these categories and we charged it down, we were going back and we have to make big additional writedowns. It doesn’t mean that doesn’t ever happen, but we haven’t seen any out-of-pattern behavior there, if that answers your question.

Rob Rutschow – CLSA

Can you give us an idea of what sort of percentage writedown we are seeing, on average?

Ted T. Cecala

Rob, I guess there are a couple of things about your question. One is the provision in how it relates to credits that moved through the different rating categories. The one credit that actually had a charge-off associated with it was Shared National Credit. And that could potentially result in a loss. But we have had very… I would to say very few actual losses as opposed to realization of loans moving to different rating categories. I did speak to loans that went into our OREO (ph) account, where we have continued to move that through and back out to the marketplace, and of the $3 million that we sold this past quarter, we realized about $100,000 in additional loss and again, we record OREO (ph) based upon what we believe will be its net realizable value. Is that helpful?

Rob Rutschow – CLSA

Okay. Yes. And I guess along that same line, what would you say you expect to… how long are you expecting to hold these nonperforming assets? And if you can give us any sort of idea for what you’re looking for for charge-offs going forward for the rest of the year that’d be helpful as well. Thanks.

Ted T. Cecala

Both of those are… that would be a difficult guess on our part. Obviously, the economy has to play a major role in that in our region because we are not lending outside the region and if we start to see improvements I think you… and you have probably read a lot of positive things that just needs to translate back into consumer confidence and once we have that then obviously some of these things will move off our balance sheets very quickly. In some situations, it may take a while. I just can’t give you a number with any degree of accuracy.

Rob Rutschow – CLSA

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of David West with Davenport & Company. Please proceed with your questions.

David West – Davenport & Co.

Thank you. Good morning.

Ted T. Cecala

Good morning.

David West – Davenport & Co.

Probably a question for Dave. Your tier one in capital in absolute dollar terms increased about $20 million sequentially. I suspect that’s related to some of the new OTTI rules, but could you walk us through that sequential increase in tier one capital?

David R. Gibson

Yes. You’re exactly right. As we adopted a new FSP… are you interested in tier one?

David West – Davenport & Co.

Yes, that was the figure I noted.

David R. Gibson

We moved about… of the original $97 million that we charged-off in the fourth quarter for OTTI when we reset under the new FSP, about $70 million of that pre-tax was deemed to be not credit related so it was moved back to OCI. So that resulted about $40 million, $45 million addition to our tier one numbers because of that adoption and then offsetting that was obviously our loss for the actual quarter.

David West – Davenport & Co.

Okay. Very good. And you mentioned a couple of times that at your quarter end, you had this sale of mortgages of about $130 million. Did that have any income statement impact this quarter or what could it possibly impact Q3?

David R. Gibson

It had a very small, minor gain under $500,000 gain on that sale and I don’t perceive it having a significant impact going forward.

David West – Davenport & Co.

Okay. Very good. And I would assume from the comments the sequential decline on mutual funds that is entirely related to the decision to waive the mutual fund fees so that is likely, given this current rate environment, to continue into the second half of the year?

David R. Gibson

Yes.

David West – Davenport & Co.

Okay. Great. Very good. Thanks so much.

Operator

Thank you. Our next question comes from the line of Andy Stapp with B. Riley & Company. Please proceed with your question.

Andy Stapp – B. Riley & Co.

Good morning.

Ted T. Cecala

Good morning.

Andy Stapp – B. Riley & Co.

Could you provide the balance of both your single issuer and pooled trust preferred securities as well as the marks on those?

David R. Gibson

Sure. Our single names had an original cost of about $70 million and as… I’m fumbling around here, and the mark… the market value at quarter end of those is about $41 million. We… our pooled trust preferred securities had an original cost of $254 million and the current mark-to-market valuation of those securities was about $59 million. That includes the mark for credit and noncredit.

Andy Stapp – B. Riley & Co.

Okay. And you happen to have the balance of 30 to 89 day delinquencies at quarter end?

David R. Gibson

I do not have that at this point.

Andy Stapp – B. Riley & Co.

Okay.

David R. Gibson

Well, obviously that will be in our….

Andy Stapp – B. Riley & Co.

Right. Okay. And do you happen to have the dollar amount of retail CRE?

David R. Gibson

I’m not sure I follow your question.

Andy Stapp – B. Riley & Co.

Your commercial real estate loans to strip centers, that type of thing?

David R. Gibson

Are you… Andy, are you talking about construction projects or are you talking…?

Andy Stapp – B. Riley & Co.

No, just mortgages.

Bill North

Mortgages? Yes. Well, hold on a second. Yes, I mean, the non… hold on there a second. I'm just going through my stuff as well here.

David R. Gibson

We really don’t break it down like that.

Andy Stapp – B. Riley & Co.

Okay.

Bill North

I mean what you have is… of the commercial mortgage line, we’ve got about $900 million of that is the non-owner occupied and that’s going to be split between your retail, your industrial, your office, some multi-family, you might have a little bit of hotel and hospitality in there. So the number you start with is about $900 million out of that commercial mortgage line, if that helps you?

Andy Stapp – B. Riley & Co.

Okay. And I missed the balance of loans to car dealers. Could you provide that for me?

David R. Gibson

Yes. To the car dealers, it is about in total between floor plan and other types of financing, it’s about $370 million today.

Andy Stapp – B. Riley & Co.

Okay. Alright. Thank you.

Operator

Thank you. Our next question comes from the line of Cheryl Pate with Morgan Stanley. Please proceed with your question.

Cheryl Pate – Morgan Stanley

Hi. Good morning.

Ted T. Cecala

Good morning.

Cheryl Pate – Morgan Stanley

I just had a question on the investment portfolio. There were some maturities this quarter. How should we think about the size of the portfolio going forward?

Ted T. Cecala

Well, at this point, we are not looking to leverage up the balances. We are probably in a maintenance mode, where we replace some securities when they have maturities based on our need to have collateral. So I wouldn’t see a dramatic change going forward in terms of the balance.

Cheryl Pate – Morgan Stanley

Okay. Then just on credit, on the commercial side, how do you think of the outlook there? I know the 90 days are kind of flat to a little bit down, but we did have a big reserve built this quarter.

Bill North

Yes, Cheryl. That is the $64,000 dollar question. I mean I think in a kind of a macro sense… I don’t know, I think we sit here… certainly, I sit here and I look at the next few quarters and I think they are going to continue to be challenging ones.

I think, overall, the good news is I think the last three quarters plus we’d probably… it’d probably stabilized things. I don’t think things are getting worse or not officially getting worse. The problem is as long as we just stay at this level, which isn’t good, you can have some things that develop problems or slide below the line of ability to service their debt to not being able to service their debt.

We look at our portfolio, as you can imagine, actively, and over the past six months have looked at it extremely actively to make sure that we are identifying the issues, that we are risk-rating them appropriately, that we are reserving appropriately as well. So I’m not giving you any real specifics, I realize, but I think the next two to three quarters I think are going to be… will be challenging for anybody who’s in the commercial lending business. And as Ted said, we can get some real improvement if we can actually get the needle to move up in terms of consumer confidence and spending and home purchases and obviously that is going to help everybody and will certainly help us given the complexion of our portfolio.

Cheryl Pate – Morgan Stanley

Okay. Great. Thanks.

Operator

Thank you, ladies and gentlemen. As a reminder, if you’d like to ask a question, you may do so by pressing *1.

Our next question comes from the line of Tom Alonso with Fox-Pitt Kelton. Please proceed with your question.

Tom Alonso – Fox-Pitt Kelton

Good morning, everybody.

Ted T. Cecala

Good morning.

Tom Alonso – Fox-Pitt Kelton

Most of mine have actually been answered. Just real quickly going back to the three credits that you mentioned earlier in terms of the increase in NPLs and I think you said that one of those that was charged-off was Shared National Credit. Can you provide any color on which one that was? I may have misunderstood what you said that’s why I just want to circle back on it.

Bill North

This is Bill North, Tom. That was the credit that Ted referred to as the continuing care retirement community developer.

Tom Alonso – Fox-Pitt Kelton

Okay. So that's the one in Maryland, right? I think you said the $21 million?

Bill North

Headquarters, yes.

Tom Alonso – Fox-Pitt Kelton

Okay. Okay. Great. Can you give us any other color on the other two? Sort of… I mean those are not Shared National Credits. I mean, just kind of sort of what happened there? I mean I think you said a developer, you said it is a retailer. Is that sort of a strip center or is that mall or something?

Ted T. Cecala

Yes, their focus… his focus is primarily on regional shopping centers. Yes, a little bit of office, but primarily regional shopping centers. And this individual had some issues on a few of his development properties projects in terms of some cost overrun issues.

He also is fighting some issues with the tenancy, had some tenants that have not shown up, obviously working diligently on that. We’ve… he’s really the one guy that we have that is kind of outside that residential realm that we have issues, obviously, and are working with closely. To date, the stuff that we have, whether it is construction or whether it’s commercial mortgage that it is of that retail or other income property type, knock on wood, is… continues to perform solidly.

But his profile is principally retail development. It has a good… has a good track record. And because of that, I mean, he’s got a stable of stabilized properties that generate positive cash flow. That obviously helps the entire situation. But we got some land partials that we need to resolve and probably dispose of, and we’ve got three or four projects that are in various stages of development that we need to finish and we need to get some additional tenants lined up. But these are regional centers. These aren’t big box power centers, these aren’t malls. These are kind of your normal neighborhood, regional strip shopping center.

Tom Alonso – Fox-Pitt Kelton

Okay.

Ted T. Cecala

And the last one in that NPA… NPL world was a credit that has been an issue and we have been working with. It’s been a classified credit for awhile now. It’s an auto dealer relationship and they continue to pay as agreed. We just felt that the situation continue to be tight. They are actually meeting their projections by and large, year-to-date, but some of the capital raising that they have in front of them has been slow to materialize. Actually, they did just inked a deal, so that will help but because we were seeing a slowness in their ability to raise some of this capital that was going to help reduce some of the debt which we need to have happen, we thought it made more sense to put it on non-accrual status.

Tom Alonso – Fox-Pitt Kelton

Got you. That is not… that is more you’re lending on the real estate where the dealership is located, it’s not actually a floor plan or is it a combination?

Ted T. Cecala

It’s a combination.

Tom Alonso – Fox-Pitt Kelton

Okay. Just one more quick one on credit here. You mentioned in the OREO (ph), there was a development in Delaware, single and multi-family residential. You said the majority of the site work is complete. Does that mean there are houses built? Or is it just lots waiting for houses?

Ted T. Cecala

Well, it is lots that have been approved and improved. So they are waiting for houses now. Now there is… I think there is a model home that’s there. It is principally ready to go and it’s one that we are talking with and trying to resolve kind of a joint venture agreement, if you will, to be building this thing out. We think it’s located attractively and the type of homes we can put on that and still cover the nut are at a price point and type that our movement in the state of Delaware. So our goal on that one is to partner up with the developer, build the thing out, and we’re getting ready and getting close hopefully doing that.

Tom Alonso – Fox-Pitt Kelton

Okay, great. Just on the troughs in the single issue of preferreds, the market value number that you gave, so $254 million original cost, $59 million market value, is that the market value or is that what you have them on the balance sheet counting the other temporary and counting the unrealized losses?

Ted T. Cecala

Counting both of the unrealized and realized losses, we have them on the balance sheet at… I have got to count my numbers up here. I hesitate because sometimes it depends on the question you are answering, we want to get answered. In terms of the amount that is our amortized costs is, bear with me here, is $175 million, but our carrying value is $73 million. So our TCE ratio reflects a $73 million carrying value, if that’s helpful.

Tom Alonso – Fox-Pitt Kelton

Okay. So that… alright. So then that $175 million is basically $254 million less your realized losses?

Ted T. Cecala

Correct.

Tom Alonso – Fox-Pitt Kelton

Okay. And then the $73 million is of the further unrealized?

Ted T. Cecala

Correct.

Tom Alonso – Fox-Pitt Kelton

So what’s the $59 million? Is that actual market value?

Ted T. Cecala

That is the actual market value priced at June 30.

Tom Alonso – Fox-Pitt Kelton

Okay. Alright. Okay. And then just one last housekeeping item. What happened sort of with the tax rate this quarter? It looks like on the operating side you recorded a net tax benefit even though you were on the plus side of the ledger there? Is that sort of something with permanent differences from the other than temporaries, if you could just give me a little bit of color there on how we should think about going forward?

Ted T. Cecala

Yes, I wouldn’t use that effective rate this quarter. We were able to realize an unwinding of a deferred tax asset relating to compensation. We had put a reserve up last year related to all the uncertainty about executive comp and deductibility and that, and we were very conservative. And pending all the new rules that have come out this quarter, when we reviewed that, we were able to unwind about $4 million of tax benefit of… record net tax benefit in the quarter.

Tom Alonso – Fox-Pitt Kelton

Okay. So then going forward, we should go back to sort of that 34%, 35% tax rate, is that right?

Ted T. Cecala

That’s exactly right.

Tom Alonso – Fox-Pitt Kelton

Okay. Alright. Terrific. Thanks.

Operator

Thank you, ladies and gentlemen. Our next question comes from the line of Andy Stapp with B. Riley & Co. Please proceed with your question.

Andy Stapp – B. Riley & Co.

Yes, just had a couple of other questions. One on this retirement center, were you the lead lender on that credit?

Ted T. Cecala

No, Andy, we are not. There is a series of different loans in there, all Shared National Credit in terms of size and structure and we were not the lead.

Andy Stapp – B. Riley & Co.

Okay. And what is your total balance of Shared National Credits?

Ted T. Cecala

In terms of dollars?

Andy Stapp – B. Riley & Co.

Yes.

Ted T. Cecala

It is… outstanding, it’s probably about $195 million which is roughly 2% of the outstandings.

Andy Stapp – B. Riley & Co.

Okay. And then, you confused me on the pooled trust preferreds. You said the – carrying at $73 million, but it’s at… the market value is $59 million? Is this in held to maturity?

Ted T. Cecala

Yes, it is in held to maturity.

Andy Stapp – B. Riley & Co.

Okay. Got you. Thanks.

Operator

Thank you, ladies and gentlemen. There are no further questions at this time. I’d like to turn the floor back to management.

Ted T. Cecala

Thanks for participating in today’s call and hopefully, we have been able to answer all of your questions. Obviously, if you need some followup, Ellen would be available to talk with you. I look forward to talking with you at the end of next quarter. Thank you very much.

Ellen J. Roberts

Thanks, everybody. Goodbye.

Operator

Ladies and gentlemen, this concludes today’s teleconference and you may disconnect your lines at this time. Thank you for your participation.

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Comments

[Go_TBPickens]

"Bill Farrell; and the Head of our Wealth Advisory Services business is not here but sorry about that I didn’t look around the room before I started reading."

"The performance of our corporate client services and wealth advisory services businesses continue to be good despite the difficult economic environment and continued market volatility."


Bill Farrell was probably too busy trying to convince high net worth wealth clients with REVOCABLE trusts, NOT to take their money away to institutions. No doubt they are hearing the news about how loaded up with commercial crap WL is. THAT will eventually affect everything else.

I pity those who have IRREVOCABLE trusts with WL. Having a irrevocable trust with WL is like leaving THEM your money, instead of to your kids.

I USED to have a trust with these players. Their wealth managers, investment managers, assistants, compliance officers, etc. ALL ended up being corrupt, lying SOB's.

They were polite enough until the day I asked them WHY they had JUNK STOCKS in my retirement portfolio. After that, they turned on me like snakes and could not have been less cooperative.

I tried to get help from the DE division of justice, but found out that WL's compliance officer used to work there before he accepted a job with WL. The division of justice sent me on a wild goose chase and ignored OBVIOUS signs of fraud from WL.

So much for watching out for the public/investors. They all work together.

What a surprise. I got the rest of my money out of there ASAP.

Sure wish the SEC would turn over THAT slimy little rock. Not likely though, because THEY ignored tips about Madoff for EIGHT YEARS, before finally doing something after it became public.

Hoping my story wakes up a few trust customers so they can get out before WL's commercial loans start there free-fall next month. The portfolio holds 20% of this valuable item....

YOU HAVE BEEN WARNED. If your stupid, keep your money here. Otherwise, go with another trust/bank company.

2009 Aug 06 08:58 AM