Integra Bank Corporation Q1 2010 Earnings Call Transcript

Executives

Mike Alley – Interim Chairman and CEO

John Key – EVP, Chief Credit and Risk Officer

Mike Carroll – EVP and CFO

Roger Duncan – EVP, Retail Manager-Community Markets Manager, President of Evansville Region

Analysts

Ross Demmerle – Hilliard Lyons

Integra Bank Corporation (IBNK) Q1 2010 Earnings Call Transcript May 5, 2010 5:00 PM ET

Operator

Welcome to Integra Bank Corporation's first quarter 2010 earnings conference call. This call is being recorded. Before we proceed, the company would like to note that statements made in the course of this conference call that are not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The risk factors and cautionary statements in the forward-looking statements are detailed in the company's filings with the Securities and Exchange Commission, and in the press release issued earlier today. The company makes no commitment to update any forward-looking statements based on new information, future events or otherwise. Please note that a replay of this call will be available for 30 days through our Web site at www.integrabank.com and by telephone at 1-800-642-1687, pass code 72339033.

Today's conference call will be presented by Mr. Michael Alley, Chairman and Chief Executive Officer of Integra Bank Corporation, and other executive officers. Following the presentation, we will open the call for questions.

At this time, I'll turn the call over to Mr. Alley. Please go ahead, sir.

Mike Alley

Good afternoon. Thank you, James. We appreciate you joining us on Integra Bank Corporation's Conference Call for the first quarter of 2010.

I'm Mike Alley, Chairman and CEO of Integra, and with me today are Mike Carroll, Executive Vice President, and our Chief Financial Officer; John Key, Executive Vice President, and Chief Credit and Risk Officer; and Roger Duncan, Executive Vice President of Retail and Business Banking.

Our comments today will refer to the financial information in our earnings report that were released short time ago, our most recent branch sale announcements, and our ongoing execution of our strategy to increase our capital levels reduce our credit risk and improve our results.

I will discuss the high level results and share our strategic initiatives. John Key will discuss our asset quality and anticipated trends. Mike Carroll will provide details of our earnings performance and financial condition. And Roger Duncan will provide an overview of our core community banking activities, and then we will open the call to questions.

Our first quarter results reflect our continued realistic assessment of the asset quality issues we face and our efforts to tackle these problems head-on. Execution of aggressive problem loan disposition action plans we developed during the first quarter, a comprehensive review of our Covington commercial real estate loan portfolio by our independent loan review staff, and an assessment that weak economic conditions will likely be more prolonged than the current cycle resulted in a significant increase in our charge-offs and loan loss provision for the first quarter.

The net loss for the first quarter of 2010 was $53.9 million or $2.61 per diluted share compared to $96.1 million or $4.64 per diluted share for the fourth quarter of 2009. This loss was driven primarily by provision for loan losses which was $52.7 million, an increase of $22.2 million from the $30.5 million in the fourth quarter of 2009. The fourth quarter 2009 results included a non-cash charge of 75.6 million which resulted from our decision to fully reserve our deferred tax assets.

During the first quarter we made adjustments to our problem asset disposition strategy and are now focused on quicker disposition of our non-performing assets as opportunities arise.

We will take advantage of opportunities to sell, exchange for other assets or accept discounted sales where appropriately, particularly, in situations in which we expect would take several quarters for values to recover.

We believe this more rapid disposition policy for troubled assets will accelerate our return to profitability and credit quality norms by providing increased liquidity for redeployment, reduce our real estate taxes, legal fees and other carrying costs and allow for more effective utilization of our work out team and reduce our overall staffing costs.

During the first quarter approximately $19.7 million of our charge-offs or nearly half results from decisions we made to accept the loss larger than we would have expected to suffer had we held the assets for an extended time period necessary for values to recover. In these cases we concluded that timely resolution of credit was in our best interest and in line with our goal to return to profitability more quickly. We also increased specific reserves in our FAS 114 evaluation with the strategy in mind.

As we execute these more aggressive disposition action plans we expect to see improvements in the absolute dollar level of our non-performing loans and non-performing assets. We also expect to see the effectiveness of our loan work out staff improve and the realization on problem credits where better opportunities exist to improve as well.

Later, John Key will provide a detailed overview of our credit quality and discuss our enhanced efforts to address our non-performing assets.

Non-performing assets including securities were $258.5 million at March 31, an increase of $11.6 million from December 31^st, while delinquencies increased 63 basis points to 1.61% of total loans.

Net charge-offs were $39.4 million during the first quarter 2010, an increase of $18.2 million from the fourth quarter of 2009.

During the first quarter we thoroughly identified the problem loans in our portfolio focused our efforts toward developing and executing aggressive disposition action plans, increased our reserves to recognize potential losses and also charged off those loans or portions of loans we deemed uncollectible.

Through this aggressive approach and I would emphasize more aggressive we believe we have adequately provided loss reserves for our most critical problem credits and should realize significant improvement in our credit provision as the year progresses.

Since we reported our year-end 2009 financial results a little less than two months ago, we have made additional progress in executing the strategies we identified at that time, namely, reaching two additional branch divestiture agreements which narrow our geographic operating footprint and bolster our capital position.

In addition to attractive deposit premiums, these branch divestiture agreements have included provisions to reduce our performing CRE and performing non-core community loan portfolio by including additional loans not originated by the branches being divested. This will result in a reduction of our concentration in CRE loans, reduce our higher risk weighted assets and neutralize the impact of the branch sales on our liquidity.

In the last 12 months, we have executed definitive agreements with six separate institutions to divest 25 branches aggregating approximately $500 million in deposits and approximately $545 million in loans. These divestitures have nearly achieved our objective of narrowing our geographic operating footprint that we continue to work with multiple interested buyers for our four branches in the Chicago market.

Excluding that market, and after completing the announced divestitures, our pro forma operating footprint will include approximately 45 branches with a 100 mile radius of Evansville, with the genuine focus on community banking.

We’re evaluating multiple alternatives to sell or exchange our performing and non-performing commercial real estate loans for cash or other types of assets, sell participation interest in loans back to the lead bank of those transactions and pursuing payoffs.

We expect we will be able to yield positive results from these initiatives as they progress during the second quarter. We’re not generating new commercial real estate commitments in either Chicago or from our CRE group in Covington, and are continuing to increase yields on existing credits as pricing opportunities arise.

As previously reported our remaining CRE relationship managers have been reassigned under new leadership to emphasize our strategy and desired outcome. We have continued to add experienced professionals to our work out team to address the Covington CRE portfolio and have assumed increased oversight from Evansville.

We have developed specific cost reduction initiative which will match our core earning capacity as we execute our branch and assets divestitures. Some of these initiatives have already been implemented but many others will be completed as our staffing needs decline following the divestitures.

This process has encompassed a comprehensive look at all operating expenses and in assessment of what our actual needs will be as we return to being a smaller institution and corresponding our systems and structure to match our size and product focus. We are not yet in a position to announce the impact of these initiatives but will do so as the reductions occur.

As Roger Duncan will share later, we’ve been successful at aggressively marketing our services to community relationship customers, diversifying our non-interest income-based and focusing on delivering an exceptional customer experience to our community banking customers.

Our core community markets and C&I businesses continued to perform very well in several key areas, but in particular, deposit growth and retention as well as credit quality. The non-performing loan ratio for these segments was 1.49% at March 31, 2010 compared to 1.79% at year-end 2009. These segments represent 51% of our total loans, but only 7% of our non-performing loans. Total deposits excluding brokerage CDs increased 45.9 million or 2.3%.

We believe we are addressing the credit and liquidity issues confronting our company, and continue to have close and positive dialogue with both the OCC and the Federal Reserve Bank of St. Louis regarding our agreements with those regulators.

Now I will have John Key update you on our credit quality.

John Key

Thanks, Mike. As Mike discussed we continued to execute on our plan to exit the commercial real estate lending business based on our Covington, Kentucky loan production office, as well as reduced our exposure in our builder based portfolio in Chicago. As of March 31, 2010, the Covington CRE portfolio stood at $732 million compared to the $765 million at year-end, a $33 million reduction. This decrease included $9 million in direct reductions to spot continuing to fulfill existing funding commitments and the $24 million in charge-off.

Our construction portfolio advances continued to slow which will allow for greater levels of future reductions. As part of the branch divestiture transactions announced today we are selling approximately $124 million of CRE loans. In addition, we are actually pursuing the potential sale of performing and non-performing credits within this group and continue to offer early repayment discounts on a selective basis.

Our Chicago-based CRE portfolio, its builder base stood at $253 million as of March 31, 2010 compared to $278 million in outstanding balances at year-end. This reflects the portfolio reduction of $25 million including $9 million in charge-off. This Chicago-based CRE portfolio at $341 million of loans as of March 31, 2009, reflecting a 26 % reduction over the last year.

Each of these real estate portfolios were affected by higher charge-off levels reflecting our more aggressive asset disposition strategies. We anticipate the balances will move down more quickly as we focus our attention on working the portfolios out of the bank with our previously discussed incentive plan with our workout teams.

As we’ve previously discussed elements within our core Evansville and community bank portfolio continued to perform extremely well. This portfolio represents just under $900 million of loan outstanding with the delinquency rate of 0.89% and non-performing loans at a very manageable level of $11 million. The economy within the bank’s core community market continues to hold up nicely when compared to state and national averages.

Real estate values remain relatively stable even though in some modest levels of decline within our Chicago portfolio, which we have built it to our reserves. Delinquencies increased during the quarter with loan 30 days to 89 days delinquent and 32.4 million or 161 basis points compared to 20.6 million or 98 basis points at December 31, 2009. Though increasing from the fourth quarter level this represents five successive quarters in which 30 days to 89 days delinquencies were at or under 175 basis points which has been our internal goal this 2009.

Delinquent loans include 18 million or 156 basis points of commercial real estate loans, 7 million or 205 basis points of C&I loans, 3.6 million or 239 basis points of owner-occupied residential loans and 3.8 million or 103 basis points of consumer credits. Of the 18 million in delinquent commercial real estate loans 3.7 million or 21% are located in our Chicago region. We remain very encouraged by our delinquency levels although there’s no guarantee this trend will continue.

Non-performing loans increased $7.2 million or 3.4% to 222.1 million or 11% of the total loans. This was partially attributable to our comprehensive internal loan review which I will discuss more in depth later.

As we reduced the size of our loan portfolio we will see continued elevated levels of non-performing loans on a percentage basis. Though we should begin to see reductions in the actual balances that we’ve moved throughout the year. Non-performing assets including securities increased 11.6 million to 258.5 million or 13.3% of total loans plus OREO as OREO increased by 4.2 million to 36.2 million at March 31.

Included in non-performing loans are $210 million of commercial real estate loans, $4.2 million of C&I loans, $4.7 million of one to four family residential loans, and 2.8 million of consumer loans. Of the $210 million in commercial real estate loans, $118 million are tied to residential development and construction, and 29.4 million are tied to retail construction projects.

Lastly, non-performing loans include $6.3 million of loans which are considered shared national credits. These non-performing loans represent 15% of our shared national credit total of 42 million.

Non-performing assets for the Covington CRE portfolio decreased to $105 million in the first quarter, while non-performing assets for the Chicago portfolio increased to $137 million due to a large Chicago area land deal being placed on non-accrual status.

In light of our higher level of non-performing loans and our shift in strategy to pursue more aggressive asset dispositions we continue to provide heavily with the first quarter provision of 52.7 million or 13.3 million more than our net charge-off at 39.4 million or 767 basis points annualized.

Net charge-offs from commercial real estate totaled $30.7 million, while net charge-offs from C&I loans were 37.3 million [ph]. Net charge-offs in our one to four family residential portfolio including home equity products were 777,000 and charge-offs on other consumer loans, excluding overdrafts were 426,000. Of this 65% were related to our indirect initiative of financing RB & Reen [ph] which we’ve been liquidating over the past four years.

With the reduction in our loan portfolio, our coverage of total loans increased 96 basis points or 21.9% as the allowance ended the quarter at $102 million or 5.35% of total loans compared to 88.7 million or 4.39% of total loans at December 31, 2009.

The allowance to NPLs ended the quarter at 45.9% of total non-performing loans, up from 41.3% at December 31, 2009. The coverage for our non-owner occupied CRE portfolio increased from December 31, 2009 at 9.06% to March 31, 2010 at 10.98%. With this we continue to believe we have adequate coverage of the risk of loss in our portfolio, particularly, in line of our current disposition strategy.

The higher level of charge-offs that loan produced in the first quarter is a reflection of three key factors. First, our decision to revise our strategies and addressing problem credits to do more aggressive and the disposition action plan directly resulting greater charge-offs in the first quarter and also impacted our reserve evaluation.

Second, during the first quarter we conducted a comprehensive internal loan review which encompass nearly 80% of our entire Covington based CRE portfolio generating a body of work that fully evaluated our current risk rating procedure tested current asset values both on current appraisal as well as trends and capture the quality and content of guarantor support for these loans.

Utilizing this information the bank has analyzed the risk in the current portfolio in a more granular fashion than ever before. As a result of this review we took advantage of new information to record partial charge-offs where permanent impairment had incurred and to adjust specific reserves to match anticipated short-term value risk.

Third, we evaluate the impact of the current economic cycle as in our historical loss ratios in assessing our bank by reserves had concluded. That’s a strange economic challenges would continue over the near-term which warrant management adjustment of our reserve levels.

To illustrate these changes I’ll provide some further specifics regarding our first quarter charge-off and reserve. We elected to take a $4.3 million loss on a real estate participation credit in Arizona as we sold our entire note back to the originating bank. Based upon our belief, the carrying costs and delayed valuation recovery warrant accelerated access from the credit.

In addition, we recognize the partial charge-offs at 3.8 million for a lease which will relieve the bank of ongoing litigation expense that would likely outweigh realization of greater value on delayed disposition of the underlying assets.

Further, we reached a settlement on a property in South Carolina which would result in taking the property into OREO in the second quarter and avoid prolonged litigation expenses and allow for more rapid sales of the property. A partial charge-off of 2.6 million was taken to reflect the anticipated realization upon the property disposition.

We’ve have acted in identifying opportunities to complete Troubled Debt Restructuring or TDRs which will result in recognizing the appropriate loss but also returning portions of the non-performing credits to an earning status. For example, during the first quarter, we restructured a secured note into a $3.6 million performing component and recognize a charge-off of 1.2 million on the remaining portion.

We continue to bolster our workout group to manage problem assets effectively. We added two additional season credit professionals to our groups since our last call and are encouraged by the progress being made on to find action plans to reduce problem exposures. With these additions, we feel comfortable we have the resources to carry our previously discussed strategy. I’m encouraged by the body and the quality of the work by this team.

Now allow me to turn it over to Mike.

Mike Carroll

Thanks, John. Looking first to quarter-over-quarter changes in the balance sheet, average total assets decreased $175 million from the fourth quarter 2009, primarily as a result of the December 2009 loan in branch sales to the Bank of Kentucky. Given the sales impact on average balances I’ll focus my discussion on comparisons of actual March 31, 2010 balances and how they compare to year-end 2009.

Commercial loan balances declined $83 million. Construction land development loans declined $33.3 million, while CRE loans decreased $28.5 million. Consumer loans declined by $11.2 million and residential mortgage loans were down $3.9 million.

On the liability side of the balance sheet, non-interest bearing deposits decreased $10.4 million or approximately 3.9%. Interest-bearing deposits increased 62.9 million or 3% driven primarily by increases in money market funds, savings accounts, broker deposits, public fund time deposits, and retail CDs. Declines in wholesale borrowing included reductions in FHLB advances of $12 million.

We continue to see very solid performance from our core bank. I would like Roger Duncan to provide you with an overview of our community markets prior to completing my financial report.

Roger Duncan

Thank you, Mike. Based on the tough financial environment we continue to work through, I’m pleased with what our community banking team has accomplished in the first quarter.

On the personal and business banking sales side, we continue to work hard to grow our deposits, manage our loan volume and maintain fee income as we reduced our overall company size.

With the branch divestitures that have occurred over the past 12 months looking at year-over-year comparison numbers, are not in accurate gauge of our success. Today, we have 11 fewer branch offices and 20 less ATMs been a one year ago.

Our checking account openings continue to be strong, both for personal and business accounts. At the end of the first quarter we have positive net account growth on the personal side and we’re slightly under on the business account side. The announced divestitures have hampered our account retention in certain markets but our account openings remain strong.

In addition, we have just reached the one year anniversary of the launch of our checking-for-everyone account targeted to low to moderate income residents. The success we achieved with the introduction of this account in our Evansville market has allowed us to expand through other footprint during the first year.

After one year we have added over 500 accounts with average balance of the $500 in this product. Our employees continue to embrace our high performance checking sales strategy and service culture and work extremely hard to target prospects.

The 2009 launch of our debit card rewards program has contributed to our success in growing our debit card income. Even with fewer cardholders from 11 fewer branches from one year ago we grew debit card income by 4% year-over-year. We increased this income from 1.26 million in the first quarter of 2009 to 1.31 million in the first quarter of 2010.

This is a result of growing our average number of transactions per card from 13 in January 2009 to over 17 in March of 2010. We have experienced similar success with ATM income and credit card income. Again, with 11 fewer branches and 20 fewer ATMs, we increased ATMs income by 25% year-over-year due to the increase in our non-customer usage fee. Our credit card income increased by over 10% compared to one year ago.

After a full January and February, our annuity sales (inaudible) strong with over 4 million in sales for the quarter, with nearly half of our sales coming in the month of March. This gave us good momentum to carry into the second quarter.

Convenience services such as our online banking and bill pay services continue to increase month-over-month. We had a record number of online bill payments in the first quarter and continue to increase online user session. This growth will help in account retention and drive operational efficiencies as more customers adopt our bank anytime service and electronic statements over paper statement.

Regarding preparation for meeting upcoming changes to regulations we have worked hard to prepare a strong plan. We have the operational components in place. We have executed our training initiative and are now communicating to our customers. It is too early to tell what our results would be, but we feel good about our execution.

As stated earlier credit quality in our core community bank and C&I businesses continue to be strong. The NPL ratio for loans in these portfolios was 1.49 at March 31^st 2010 compared to 21% for the remainder of our portfolio.

As you can see by our first quarter results the core bank continues to produce positive results despite other challenges we faced in the company. Our strategic plan calls for a return to our strong community banking roots in and around Southern Indiana, West Kentucky and Southern Illinois. This is what we do best.

Our experienced team remains focused on gathering deposits, creating new lending relationships, growing our income and deliver exceptional service to our customers. We will continue to work hard through the issues we face and continue to sell relationships by doing what is right for the customer.

I’ll turn it back over to Mike Carroll.

Mike Carroll

Thanks, Roger. I will now provide additional details on our financial overview. During the quarter there was little change in both total securities and the composition of the portfolio. Our available for sale portfolio of $359.4 million includes $161.8 million of 0% risk weighted Ginnie Mae and Treasury securities; it was $12.3% of total assets at March 31^st

During the second quarter of 2010 we plan to use a portion of our cash balances to purchase additional securities. The intent is to purchase a combination of 0% risk weighted US treasuries and Ginnie Mae securities. We plan to allow the maturities of these securities and intend to keep the average life of the mortgage backed securities between two years to five years with minimal extension risk. This strategy will improve profitability and the additional securities will be available as collateral, thus providing source of liquidity.

We did incur other-than-temporary securities impairment charge of $210,000 on two securities we’ve been watching closely, but also had a gain in our trading account of $179,000 resulted from an increase of the value of trust-preferred securities on which we recognize OTTI on in 2008 and 2009 and subsequently moved to trading in 2009.

These two pool trust-preferred securities currently have loss exposure of $3 million and we continue to watch them very closely. The underlying collateral performance remains satisfactory at a non-agency CMO portfolio, which totals $21.6 million. The market values for each security in this portfolio increased during the quarter and are approximately 10.9% higher as a percent of the amortized cost then in March 31, 2009.

We continue to stress test these portfolios both internally as well as to third-party stress test. The gross unrealized loss in our securities portfolio decreased from an $11.2 million at December 31, to $8.9 million at March 31, while the net unrealized loss was $3.7 million.

Assuming real estate values remain at or about current levels we continue to believe the worst is behind us and we do not expect material OTTI charges in 2010.

Our net interest margin was 2.40% for the quarter, unchanged from the fourth quarter. Liability cost decreased six basis points during the quarter while earning asset yields declined one basis point.

Net interest income declined $869,000 from the fourth quarter 2009, largely due to a decline in average earning assets of $118.8 million have resulted from the fourth quarter branch and loan sale of the Bank Kentucky.

Non-performing assets reduced the margin about 51 basis points during the quarter. Our yield on commercial loans increased four basis points from the fourth quarter 2009 to 3.66%. This is largely due to our ongoing efforts to increase pricing by adding floors to new credits as well as existing credits from the opportunity arises. Approximately, $255.4 million of our commercial loans had a four release 4% at March 31^st up from only $7.5 million a year ago.

We expect the net interest margin in the second quarter to decrease slightly at semi-static rates. The decrease is due to the additional liquidity we expect to carry during the quarter and the re-pricing of about $25 million of repurchase agreements. The announced branch sales and liquidity initiatives will have a negative impact on the margin in successive quarters. This does not include the margin impact of any unannounced branch or loan sales.

Improvements in the margin would come from a reduction and non-performing loans and continued re-pricing of floating rate loans as well as an increase in short-term rates.

We continue to maintain an asset-sensitive position meaning we should benefit immediately from any increase in short-term rates. We have net asset sensitivity of $257 million to prime, $561 to one month LIBOR and net liability sensitivity of $149 million to three month LIBOR.

Non-interest income was $7.6 million for the first quarter 2010 compared to $13.8 million for the fourth quarter 2009. The fourth quarter 2009 included $5.3 million in deposit premium for the branch sale. Deposit service charges decreased $1.1 million during the first quarter 2010, largely due to changes in consumer behavior, the seasonal impact of income tax refunds and the impact of the fourth quarter 2009 branch sale.

Non-interest expense was $22.5 million for the first quarter 2010 compared to $23.2 million for the fourth quarter 2009. The fourth quarter 2009 included a $1.6 million building write-down on two banking facilities, which was offset by a $626,000 stock-based compensation forfeiture adjustments that reduced expense as well as a $1 million reduction of post-retirement benefit expense that resulted from and changed our benefit plans.

Personnel expense increased $787,000 during the quarter due to the two fourth quarter 2009 reductions to expense mentioned earlier offset by the impact of reductions in personnel that reduced first quarter expense. We established a full valuation allowance for the income tax benefit generated during the first quarter 2010 resulting in a 0% percent effective tax rate.

As Mike stated earlier we have a defined strategy in place to return to profitability. When we return to profitability the tax expense generated by positive earnings will be entirely offset for quite sometime by the benefit of reversing the same amount from our valuation allowance to our income statement.

Integra Bank’s total risk-based capital ratio was 8%, a decrease of 205 basis points from December 31. The decrease resulted from the impact of the quarter’s net loss partially offset by declines in loan balances and loan commitments. Integra Bank’s Tier 1 risk-based capital ratio decreased 205 basis points to 6.71% and its Tier 1 leverage ratio decreased to 139 basis points to 4.91%.

All of Integra Bank’s regulatory capital ratios are at or above the minimums for adequately capitalized standards. We continue to work on our plan to increase the Bank’s total risk-based capital ratio to at least 11.5% and as Tier 1 leverage ratio to 8% which we agree with the OCC to achieve.

The primary impact of the decline from well-capitalized to adequately-capitalized status at the bank levels in the area of liquidity we may no longer accept renew or roll over brokerage CDs and are now subject to restrictions on the rights we can pay on our retail deposits. The rate restrictions that are now in place affecting only a small number of our deposit account offerings.

We have been planning for these risks for sometime and believe we have action plans to preclude any material impact on liquidity. We expect to remain adequately capitalized at the Bank level of June 30 and increase our capital position during the third quarter.

During the second quarter two of our announced branch sales are expected to close and contribute 65 basis points of total risk-based capital to the bank. The remaining three transactions are expected to close during the third quarter and contribute 310 basis points of risk-based capital. This boost our capital position is expected to offset and in the third quarter outpaces the impact of any expected losses.

The company’s tangible common equity to changeable assets ratio declined 171 basis points to a negative 1.29%. In addition, the company’s Tier 1 leverage ratio declined 217 basis points to 2.26%, which is below the minimum for adequately capitalized status. We expect the strategies we’re executing in 2010 to increase these important ratios.

At our shareholder meeting on May 6, we anticipate shareholder approval to authorize the execution of a reverse stock split. We have not made a final decision on the conversion ratio or timing of any split, but wish to maintain an option, but where stock split would likely increase our stock price and reduce the number of outstanding shares to levels more appropriate for the community banking company we expect to be upon completion of our asset branch divestitures.

We are very pleased to report that our stock price closes over dollar for the 10th consecutive business day today being that we anticipate being notified that we have regained compliance with NASDAQ bid price rule. Our initial (inaudible) was to have expired in June 14^th 2010 at which point we were to receive notification from NASDAQ that our stock was subject to delisting.

We continue to look for opportunities to reduce targeted loan category, especially, construction development and have also explored the opportunities to sell non-core assets. We expect the five announced any branch and loan sales to add about 375 basis points of total risk-based capital to the bank upon completion of the transactions as well as 120 basis points to the company’s tangible common equity to tangible assets ratio.

We expect to complete the UCB and (inaudible) bank transactions in the second quarter 2010 as well as the $15 million loan sales to Citizens Deposit Banking Trust while the remainder of the sales are expected to occur during the third quarter.

Deposit premiums for the second quarter and third quarter are expected to approximately $4.1 million and $17.5 million respectively while the reduction in risk weighted assets resulting from the five branch sales and the loan sale to citizens are expected to approximately $80 million in the second quarter and $345 million in the third quarter. At least one additional sale is also expected to provide additional capital.

It continues to be our intent to maintain liquidity levels at or above current levels during the second quarter 2010. Our access through both the Federal Reserve and Federal home loan banks as well as other sources will allow us to maintain adequate liquidity even if we experience a decline in retail public fund deposits.

The impact of the five announced branch transactions and the loans of the citizens is expected to result in a cash reduction of approximately $19 million or about 4% of our total cash and cash equivalents of March 31^st^.The minimal impact of cash to these sales is a result of our efforts to make each one of these transactions as cash neutral as possible.

Let me turn the call back to Mike Alley.

Mike Alley

Thanks, Mike. In conclusion we are disappointed with our credit results for the first quarter but believe we now are in a better position to manage and reduce our non-performing assets than ever before. We are having success and executing the business strategy we had shared with you on our last earnings call and we have the ability to traverse the gap created by our credit issues to a break even point and then forward to a sustainable level of profitability.

Definition of our new geographic operating footprint is nearly complete and we have begun repositioning our infrastructure needs to support a remaining community banking business. This process will be implemented aggressively in the second quarter and third quarter, as the divestures are completed.

Finally, we recognize that raising new capital would help us restore our capital position back to the levels we previously enjoyed. We have and will continue to evaluate alternatives as to when and how to raise that capital. To-date, our immediate focus has been on executing the strategies outlined earlier and that will continue throughout the second quarter as well the development of our strategies to raise additional capital. These plans may include conversion of our US treasury preferred stock to common as part of an overall capital plan. We will provide additional details in this area as the appropriate time occurs.

We’ll now be happy to answer any questions. James, would you please open the lines so that we may take questions?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Ross Demmerle of Hilliard Lyons. Your question please.