First Defiance Financial Corp. (NASDAQ:FDEF)
Q4 2010 Earnings Call Transcript
January 25, 2011 11:00 am ET
Mary Beth Weisenburger
Bill Small – CEO
Don Hileman – EVP and CFO
Jim Rohrs – CEO of First Federal Bank.
John Barber – KBW
Brad Matt [ph]
Ross Habermen – Haberman Management Crop
Good morning and welcome to the First Defiance fourth quarter and full year 2010 conference call. All participants will be in listen-only mode. (Operator instructions) Please note this event is being recorded. I would now like to turn the conference over to Mary Beth Weisenburger with First Defiance Financial Corp. Please go ahead.
Mary Beth Weisenburger
Thank you. Good morning everyone and thank you for joining us for today’s fourth quarter and full year 2010 conference call. This call is also being webcast and the audio replay will be available at the First Defiance website at fdef.com. Providing commentary this morning will be Bill Small; Chairman, President and CEO of First Defiance and Don Hileman; Executive Vice President and Chief Financial Officer. Following their prepared comments on the company’s strategy and performance, they will be available to take your questions.
Before we begin, I would like to remind you that during the conference call today including during the question and answer period, you may hear forward-looking statements related to future financial results and business operations for First Defiance Financial Corp. Actual results may differ materially from current management forecast and projections, as a result of factors over which the company has no control. Information on these risk factors and additional information on forward-looking statements are included in the news release and in the company’s reports on file with the Securities and Exchange Commission.
And now I'll turn the call over to Mr. Small for his comments.
Thank you Mary Beth. Good morning and thank you for joining us for the First Defiance Financial Corp conference call to review the 2010 fourth quarter and year-end results. Last night, we issued our 2010 earnings release and this morning we would like to discuss that release and give you a look forward into 2011.
At the conclusion of our presentation, we will answer any questions you might have. Joining me on the call this morning to give more detail on the financial performance for the fourth quarter and the year is CFO; Don Hileman, also with us this morning to answer questions is Jim Rohrs; President and CEO of First Federal Bank.
Fourth quarter 2010 net income on a GAAP basis was $2.3 million or $0.22 per diluted common share, compared to $555,000 and $0.01 per diluted common share in the 2009 fourth quarter. For the year-ended December 31, 2010, First Defiance earned $8.1 million or $0.75 per diluted common share, compared to $7.2 million or $0.63 per diluted common share for 2009.
As 2010 came to an end we continued to face many challenges in the banking industry. We are still dealing with the historically low, high unemployment levels and a housing sector that is not found its footing. From [ph] economic indicators of pointing to a sustainable recovery, the job role continues to lag and foreclosures on homes remain high.
Throughout the year a high provision expense and additional expenses associated with collections and other real estate owned relating to these issues, had a negative impact on earnings. However even in this environment, we have confidence in our core operation and our fundamental operating metrics were again very solid. I am pleased to report that despite the continuing challenges in this operating environment, the company remained profitable for the quarter and the full year 2010.
Beyond our normal business activities during the year, the company successfully converted its core operating systems in the fourth quarter with no significant service interruptions with client impact. The core conversion project consumed significant resources in both capital and staff terms. The reach of this project was extensive, and it took many months to unfold. I am proud of the conversion team and their efforts as they consistently placed client needs first and work to mitigate any negative effects.
From an overall performance viewpoint, net income was flat with the linked quarter but was up significantly over fourth quarter of 2009. Full-year results for 2010 were also up over 2009 results. Net interest margin performance throughout the year, increased mortgage production in the second half of 2010 as well as improved performance in both our wealth management and insurance business, all helped to offset the credit related expenses and the costs related to the core conversion.
Asset quality performance in the fourth quarter was again considerably weaker than our historic standards. Our provision expense in the fourth quarter 2010 was down significantly from the 2009 fourth quarter, the total provision for 2010 was at the same level as 2009. In light of the continued environment of high unemployment as well as the overall uncertainty of the commercial real estate market, we believe it is prudent to maintain reserves at this level.
This decision drove the provision expense throughout the year, bringing our ratio of allowance of loan loss to total loans up to 2.7%. With a sizeable increase in charge-offs during the fourth quarter as we were more aggressive in writing down collateral values and disposing of OREO. We did have a slight improvement in the fourth quarter over the linked quarter in our level of non-performing assets. We continue to devote significant resources to the monitoring and early recognition of any weaknesses in the portfolio, or we are not seeing new specific home [ph] problems to arise in the portfolio.
We are focused on the overall economic environment in which we are operating. We believe the overall reserve bill was appropriate based on the still tentative condition of the economy. In line with the prudent decision to maintain the loan reserve and preserve capital at the bank, the board of directors has continued to differ on paying a common dividend. We believe that the fundamentals of the company remain sound, but it will take some time to work through the problem credits and allow the economy to show sustained improvement.
As we get the troubled assets work through the system and the economy stabilizes, we expect to return to levels of profitability more consistent with the bank. We have many encouraging indicators in our fourth quarter performance; one of the significant positive stories in the quarter with the net interest margin remained relatively strong at 3.89% producing another solid quarter of net interest income performance.
We have a disciplined pricing strategy that resulted in the stable net interest margin for the quarter and we will continue to focus on managing the margin and adjusting our pricing strategy as changes in the market warned [ph]. Non-interest income in the 2010 fourth quarter was flat compared to the linked quarter but up over the 2009 fourth quarter and up about 5% for all of 2010 compared to 2009.
Mortgage banking income was down significantly for the full year, was a major contributor to non-interest income in the fourth quarter of 2010. Mortgage originations were strong throughout the second half of 2010 as the low interest rates drove another round of refinancing. However activity did begin to slow during December as rates started to rise. Income from our insurance and wealth management areas was also up compared to 2009 fourth quarter and year end results.
The acquisition of the additional group benefits, book of business in May of 2010 continues to add to our insurance agency performance. Our trust in investment lines [ph] within wealth management continued to grow their business relationship leading to record performance in those areas. Total non-interest expense was up from the – through December 31, 2010 over the fourth quarter of 2009. The fourth quarter of 2010 included a large portion of the expenses related to our core system conversion.
Other increases included compensation, deposit insurance premium and deferred compensation expense, these were partially offset with reductions in marketing and other non-interest expense. Total loan balances at December 31, 2010 were down 6% from year-end 2009. Commercial loan demand overall remains flat as businesses remain cautious about making new capital investments but we are seeing signs of renewed optimism as the economy looks to be stabilizing and consumer demand is picking up. However we remain guarded in this environment as we review credit request.
Total deposit balances at year-end were basically unchanged from year-end 2009 but the mix made a very favorable change throughout the year. We continued to drive success growing our non-interest bearing deposits and this strategy has had a positive impact on net interest margin. Our asset liability committee is very focused on managing the spread between loans and deposits but there is little room left to lower deposit rates which requires us to be in a more disciplined on the lending side and further emphasizes the need to focus on non-interest bearing deposits.
I will now ask Don Hileman to give you additional financial details for the quarter and the 2010 year, year-end before I wrap up with an overview and I look at, what we see developing for 2011. Don.
Thank you Bill and good morning everyone. The fourth quarter saw improved profitability with continued strong mortgage banking income driving non-interest income as well as higher net interest income. The company successfully converted its core systems in the fourth quarter with no significant service interruptions. We have been preparing for this for well over a year and look forward to the added efficiency and features in this in the system will contribute to our operation.
Also in the fourth quarter, the annual regulatory safety and soundness exam was completed. Credit quality continues to meaningfully impact earnings with higher levels of provision for loan loss. Credit and collection cost have moderated from the fourth quarter of last year and on a linked quarter basis, they still remained significant. The markets are consistently showing the affects of a difficult economic environment.
While we are seeing some moderation and reduction in unemployment in our market area, it continues to have a major impact on most of our economies we serve. We are slightly optimistic that the overall trend is indicating improved economic activity, however it will be a irregular and take time to solidly develop with an extended ramp up period well into 2011. As we review our financial performance, overall credit remains a major factor and impact on our performance.
However we also have several areas of strength such as mortgage banking and the stability of our net interest income. I will begin with a discussion of credit quality. Our provision expense totaled $5.7 million, down from $8.5 million a year ago and up slightly on a linked quarter basis. Our allowance for loan losses increased to $41.1 million or 2.7% of total loans from $36.5 million or 2.26% at December 31, 2009. The reserve bank remained basically flat on a linked quarter basis.
The fourth-quarter provision was $263,000 less than the net charge-offs for the quarter. The overall reserve levels consistent with our anticipation of prior and near-term charge-offs. In those [ph] net charge-offs, were 158 basis points for the fourth quarter of 2010 compared with 79 basis points in the fourth quarter of 2009 and 70 basis points in the third quarter of 2010. Of the total charge-offs, 79% related to commercial real estate, 8% to residential, 7% to home equity and consumer loans and 6% to commercial loans.
Of the total commercial real estate charge-offs, 51% or $2.5 million was due to one prior relationship. Well, I am encouraged by the recent slight reductions in the unemployment into our market, we continued the uncertainty of the overall current economy is, and specifically lower real estate values and economic weaknesses as well as the current regulatory environment. It gets cautious as to the timing of economic recovery. As we see improvements in our asset quality turns as well as in the economy, we are more confident as to the future direction of asset quality.
We maintain a continuous process of analysis to review our loan portfolio as well as review the credit revolution process, one of the alternatives is for the bank to take control of the real estate collateral either by way of foreclosure or by attaining (inaudible) volunteering from the borrower via foreclosure.
Our OREO balance declined on a linked quarter basis and then into the fourth quarter of $9.6 million. The OREO balance is made up of $7.8 million of commercial real estate and $1.8 million of residential real estate. We had additions of $2.1 million in the fourth quarter of 2010 offset by sales of $2.6 million and valuation adjustments of $1 million. We continue to be active in seeking potential buyers of these properties, to encourage more sales opportunities as they go to auction or are listed for the sale with the exception, expectation of lower value as the market inventory of these types of properties continues to increase.
At December 31, our allowance for loan losses represented 2.7% of total loans outstanding, up from 2.67% on a linked quarter basis and represents 87.21% of the non-performing loans which is up from 76.29% of non-performing loans at December 31, 2009. The allowance of non-performing assets was 72% at December 31, 2010 up from 59.5% at December 31, 2009. Non-performing assets ended the quarter at $56.7 million or 2.78% of total assets, down from 2.8% on a linked quarter basis and down from 2.99% at December 31, 2009. Total non-performing loans decreased to $47.1 million from $47.9 million at December 31, 2009.
In the fourth quarter non-accrual loans increased $3.6 million primarily due to one large credit relationship to $41 million from $37.4 million on a linked quarter basis. Restructured loans decreased $2.7 million from last quarter. Restructuring loans are considered non-performing because of the changes in the original charge granted to borrowers. It is an important note that these loans are still accruing. This is a process in which we can work with borrowers who have the ability to repay to mitigate loss potential.
Total classified loans increased $4.9 million to $133.1 million at December 31, 2010 from $128.0 million at December 31, 2009 and from a $127.6 million at the September 30, 2010. We are disappointed in the increase we believe we have provided for any potential loss. Total delinquency was 3.4% at December 31, 2010 up from 3.18% at December 31, 2009, and up from 2.9 % on a linked quarter basis.
(inaudible) non-accrual increased to 2.68% this quarter up from 2.4% in the third quarter of 2010, it was up from 2.5% at December 31, 2009. We’re not satisfied with the overall levels of delinquency; however we did note a reduction on commercial real estate 90 day on accrual rate moving from 3.01% last quarter to 2.84% this quarter. Of the total non- accrual loans of $41 million, $15.5 million are under 90 days past due.
We believe we have a diversified portfolio and a low average loan size with minimal (inaudible) in the most problematic segment of commercial real-estate such as big box. Retailers and large office building incurred us a generally under economic cash flow basis that required meaningful equity and personal grantees. We continue to strengthen our collateral [ph] review process increased the overall scope of loans.
We individually view on a quarterly base, improving credit quality reducing the level of non- performing asset and classified asset is a major focus of the company. Mortgage banking was up in the fourth quarter driven by strong re-finance activity in this low rate environment. We have seen a tapering off of the applications to over the last several months. Overall mortgage banking income for the quarter was $2.7 million compared to $2.1 million in the fourth quarter of 2009, and $2.3 million on a linked quarter basis.
We had a gain on sale of income of $1.8 million in the fourth quarter of 2010 compared with $1.5 million in the fourth quarter of 2009 and $2.8 million in the third quarter of 2010. We also recorded a positive valuation adjustment to mortgage servicing rights of $1.1 million in the fourth quarter of 2010 compared with positive valuation adjustment of 397,000 in the fourth quarter of 2009 and, a negative valuation adjustment of 527,000 on a linked quarter basis.
A positive valuation adjustment in the fourth quarter reflects the change in the level of market interest rate, that affect the assumed prepayment speeds of the underlying collateral. At December 31, 2010, First Defiance had $1.3 billion in the loan service for others. The mortgage servicing rights associated with those loans had a fair value of $9.5 million or 75 basis points on the outstanding loan balances service.
Total impairment reserves which are available for recapture of future periods totaled $1.1 million at the end of the quarter. The fourth quarter was a first period in which we did not require charges for other than temporary impairment. In the fourth quarter of 2009, we recorded a charge of $1.4 million for other than temporary impairment. This fact reflects a more stable economic environment as it relates to our investments and trust-preferred collateralized debt obligations. The trust-preferred CDO investments in the portfolio a total book value of $3.8 million and market value is at $1.5 million at December 31, 2010.
The book value of the CDOs with OTTI at December 31, 2010 was $1.8 million with a market value of $502,000. The book value of CDOs without credit impairment was $2 million with a market value of $995,000. The aggregate decline in value of those investments primarily due to the lack of liquidity in the CDO market and they are still on certain operating environment for financial institutions. These investments continue to pay principal interest in accordance with the contractual terms of the securities. Management has not been impairment is value of these securities, the other than temporary and therefore it’s not a recognized reduction on those investments and earnings.
Turning to our other operating results our net interest income was $17.8 million for the quarter compared to $17.8 million on a linked quarter basis and up from $17.5 million in the fourth quarter of 2009. For the quarter our margin was 3.89% which was a 7 basis point increase from the fourth quarter of 2009 and 5 basis point decrease on a linked quarter basis. We have been successful in lowering our cost of funds where this quarter indicated (inaudible) decline in asset yields.
We’re seeing more aggressive comparative pricing pressure and the downward re-pricing of variable-rate loans based on the current yield curve. The increase in our liquidity position has also impacted the margin as we have seen an increase in overnight deposits. However, we believe our liquidity position continues to be important, gives us the added flexibility and overall liability pricing. We have been able to shift the asset mix somewhat this quarter from cash into and the intermediate term securities. And we continue to look for investment opportunities on the short intermediate and the yield curve.
We have placed a strong emphasis on non-interest bearing deposit accounts, and saw the balances grow this quarter. We are focused on pricing opportunities to maintain and expand the margin. We are particularly focused on asset pricing discipline and the challenges in maintaining asset yields. Our cost of funds decline 18 basis points on a linked quarter basis with yield on assets declining 22 basis points. The income declined to $2.9 million in the fourth quarter of 2010 from $3.3 million on a linked quarter basis compared with $3.5 million in the fourth quarter of 2009.
Insurance revenue was $1.3 million in the fourth quarter of 2010, down slightly from $1.4 million on a linked quarter basis and up from $1.1 million in the fourth quarter of 2009. The year-over-year insurance revenue increase is primarily driven by the acquisition of the group benefits in the second quarter of 2010. Overall non-interest expense increased to $16.5 million this quarter compared to $14.6 million in the fourth quarter of 2009 and decline from $17.1 million on a linked quarter basis.
The fourth-quarter compensation of benefits expenses increased to $7.2 million from $7.1 million on a linked quarter basis and from $6.4 million in the fourth quarter of 2009. Our compensation and benefits expenses increased to 128, 000 on a linked quarter basis, and 845,000 over the fourth quarter of 2009. Majority of the increase over the fourth quarter of 2009 relates to variable, performance based compensation.
Our total FDE [ph] level has been consistently around 500 employees throughout the year. We believe we are close to the optional staffing level necessary to maintain our quality customer service culture as customer’s desire and expect from First Defiance.
FDIC insurance expense increased $248,000 in the fourth quarter of 2010 compared with the fourth quarter of 2009. Other net non-interest expense increased to $4.4 million in the fourth quarter, from $3.7 million in the fourth quarter of 2009, and declined from $5.3 million on a linked quarter basis. Increases in expenses over the prior year of $802,000 for core conversion cost $162,000 change in deferred compensation valuation, auditing $56,000 and examination fees $118,000. The fourth quarter of 2009 other non – interest expenses had a credit of $175,000 owing to the recovery of our (inaudible) losses. On a linked quarter other non- interest expense declined $866,000 primarily due to decreases in credit collection costs of $1.9 million.
Included in the credit collection cost was a decrease of $1 million in OREO write downs rate down. We believe that we have a balanced approach to cost control in this difficult environment. As well as sustained focus on customer service and costumer acquisition. We continue to look for opportunities to expand our market presence in strategic growth markets. We saw the balance sheet contract in the fourth quarter, with total asset shrinking by $21 million from December 2009, to $0.04 billion at December 31, 2010. On the asset side cash and equivalents grew $48 million over the year to $169.2 million at December 31, 2010.
Securities grew $26.7 million over the year to $166 million. Gross loan balances declined $98 million year-over-year and declined $34 million on a linked quarter basis. Loan activity in general continues to be weak, but we’re seeing some signs of increased commercial loan activity. We continue to be prudent on our new loan activities. We have been disappointed on our underwriting and we have not focused on growth of expenses are taken on greater credit risk or lowered rates to increase loan volume.
We have been intent on making sure our service levels have not suffered as a result of the increased level of loan workouts. We have been able to develop strong new relationships with good commercial clients. The total deposits declined $5 million from December of 2009 and declined $15 million on a linked quarter basis as we allowed higher priced CDs to write off.
However, we are pleased with the mix of deposits, since we have seen a growth in non-interest bearing account balances. Non-interest bearing balances deposits increased to $217 million at December 31, 2010, up from $189 million at December 31, 2009. We continue to focus on growth and non-interest bearing balances in correlation with the overall strategy and efforts to reduce cost of funds in this interest rate environment. Our capital position remains strong with shareholders equity to 7.7% at December 31, 2010 from a 11.4% at December 31, 2009. Our risk-based capital ratio was strong at approximately 14%. That completes my review of the quarter and I will turn the call back to you Bill.
Thank you, Don. As we move forward into 2011, we will continue to address the challenges that face the entire banking industry. We do feel more optimistic entering this year, even if the overall economic climate throughout our market area varies from industry to industry. We do see signs of improvement in manufacturing and other sectors that is certainly encouraging. Business inventories have been significantly reduced and the consumer seems to be gaining confidence.
This folds well for our commercial customers that have weathered the storm to this point and are now seeing some relief to cash flow pressures. Unemployment numbers are still running higher in this region compared to the national numbers but there have been a few instances of callback from even some new hires. While this is encouraging, we feel that most companies remains slow to recall their workers until they develop more confidence and the strength and sustainability of the recovery.
The elevated unemployment levels will further strain consumers by meeting their debt obligations. Our credit staff continues to work at identifying any weakness early noted to mitigate potential losses. On the commercial lending side, asset review functions and delinquent loan reporting requirements continued to be maintained in monitoring the portfolio. We review credit concentrations by industry and have placed lower limits on lending within certain types of loan categories. We have further segmented our commercial real estate portfolio to track the general performance of these segments and better analyze potential problems earlier.
We also coordinate calls between our lenders and our insurance agents to develop total financial relationships within our customers. Our forecast shows modest loan growth in 2011. Housing is the one area that would continue to be a drag on the recovery. In this area, we feel that the home prices have at least stabilized for a well below levels of four or five years ago. Our closures continued to run above normal levels and can be expected to stay on that pace for a good portion of the year, adding to the inventory of homes on the market.
Mortgage home growth as I said earlier is expected to be slower in 2011, as interest rates have come off their nose, removing the main incentive to refinance. Mortgage rates still remain at historically low levels and this will hopefully facilitate an increase in purchase money borrowing. Deposits rates remain low as banks have (inaudible) pressure to increase rates while businesses and consumers continue to build their deposit balances. The Federal Reserve’s Quantitative Easing program also is at work to keep rates to from rising and hopes the (inaudible) out the recovery.
Deposit growth should remain steady at least through the first half of the year and unless the Fed decides to move rates sooner than currently anticipated. Based on current rate forecast, we expect the net interest margin to stay relatively flat in early 2011 and increase as the year goes on. But the passage last July of the Dodd-Frank Act and its establishment of the Consumer Financial Protection Bureau, we will be closely monitoring the impact on non-interest income from bank deeds.
The change in Washington power structure resulting from last November’s elections will certainly add a new twist to the development of these regulation. We do know that we will be under a new regulator as of mid-year as the office of Thrift Supervision has merged into the office of the Comptroller of the Currency.
Following this merger in July, the OCC will become our new bank regulator and the Federal Reserve will then regulate our holding company. Even with all of this is regulatory and economic uncertainty going on around us; I think there are many points of encouragement and strength as we move further into 2011. The general economic picture is more encouraging than it was six months ago. The economic indicators in the manufacturing sector and even in housing has been more positive in recent months. Consumer confidence, while still tentative is growing as the markets recover and inflation stays under control.
We are encouraged by the strong core performance of First Defiance during these challenging economic times. Basic business plan is sound and as problem assets work their way to and out of the system, this bodes well for the future. We have built a recognized and respected brand throughout all of our markets and maintain significant market share in all of them. We are confident that our new core operating systems is going to deliver innovations and efficiencies that will build on our historical success. We look to this to be a year of controlled group with more opportunities to establish new business relationships and further strengthen existing ones. We firmly believe our strategy, in our strategy and feel it was validated by successfully getting us through the challenges over the last several years. We thank you for joining us this morning and now we will be happy to take any of your questions.
Our first question comes from John Barber of KBW.
John Barber – KBW
Good morning everyone.
Good morning John.
Good morning John.
John Barber – KBW
Don, you mentioned the company completed its annual and safety and sound exam in the fourth quarter. Just to be clear, does that mean that results – from the exam are in this current quarter?
John Barber – KBW
Okay, great. And CNI non- performing loans were up by, I think it was $4.6 million this quarter versus last quarter; could you talk about what drove that increase?
As far as specific loans in the CNI category is that –
John Barber – KBW
Yes it was specific loans that, that will be great if you add any color.
Pertaining to a large credit, the way into the non-accrual status which was about $4 million in the quarter.
John Barber – KBW
The biggest driver of the increase in that category.
John Barber – KBW
Okay, thanks and then, the decline in service charges is that mostly weighted to the one before I made or I gave.
Yes, that relates a lot of it, it also mostly interchanges as it – to relate to NSF. And that pattern of change when we look at some of the details.
John Barber – KBW
Okay, so outside the seasonality is this a pretty good run rate?
I would hope so.
Yes depending on what comes out we writing in (inaudible) of Dodd-Frank.
I think there still – is a little contraction in that category to run through the systems – but hopefully it is close.
John Barber – KBW
Okay, thank you.
Thank you John.
(Operator instructions) our next question comes from Brad Matt [ph]
Hey guys, how are you doing?
Hi Just, as a follow-up with the drop in service charges, I know a lot of banks are talking about may be new pricing models to recoup some of those fees, is that something that you are on considering?
(inaudible) something that, we're having some discussion on here is, what we can do to offset some of that, again we are kind of waiting to get a little bit, a better feel for exactly how the rates are going to be written. The FDIC came out with some guidance, a month or two ago in regards to their view on franchise on – overdraft programs and such and all they have issued is guidance, we will not be shocked to see the regulators pick it up as depository, so we are studying those and certainly looking at anything that we might be able to do to offset some of that run-off.
Sure, appreciate it. Looking at the other expenses and backing out the 800,000, one time data processing conversion expenses, it looks like core managers expenses were closer to $15.7 million looking forward and I was thinking it could be some cost savings going forward with the (inaudible) that same conversion, what should be our expectations for total non-interest expenses?
Well, we expect to have some benefit from the core conversion, what is not in the first quarter was the – any impact is from any compensation increases. We have that on a schedule, it is not effective at the first of the year, we have a March 1 review period there, so there will probably be an expectation of some compensation adjustments in the latter part of the quarter, as we finalize that process.
Sure, okay let's see, the one more question here and, I will let someone else jump in. It looks like in the fourth quarter, it was at rather enlarged portion of real estate net charge-offs. Can you just give us without telling us the identity of the client, can you just give us, what happened in the quarter with that credit, what was the industry – what was the balance- beginning balance of the loan, why was it charge down $4 million – any type of a characteristics, you help us out.
Well Jim Rohrs will answer that question.
It was a large shopping centre loan, about $4 million loan that we have taken of- reserve of about $2 million on some time ago and the charge of resulted from that moving through the system where we think that will probably come in the OREOs hopefully up this month, so it is a recognition, more of everlasting or probable and possible and so we did take that charge-off.
Okay, and so if the $4 million loan, probably your typical 80% loan to value, so it is probably originally worth property $5 million. And now -
I can answer that, it is probably closer to 6.
Okay, and now if it’s
Operating fall into a little bit of distress sort of, the value is down because of the distress but also because of this general market condition.
Right. So, from going from $6 million $2 million, so down 66%, is that primarily just from tenants leaving a shopping centre or is it tenants are still paying, it is just strictly, what they overbought originally.
And its waving.
Okay, and Bill, can you tell us what other exposures to consumer situation shopping centre, you guys have in the portfolio.
Yes Brad, actually we have relatively well, we have got less than $30 million outstanding on shopping centre loans right now out of our total portfolio so it is not an area of concentration by any means.
Okay and it is that the portfolio, portfolio of shopping centers, they perform a lot better, I take it.
Yes much better.
Okay, I'd appreciate it. I will let somebody else jump on.
Your next question comes from Ross Habermen at Haberman Management Crop
Good morning Ross.
Ross Habermen – Haberman Management Crop
Good morning, heard you. Sorry, sorry, have you put an estimate on what the additional overhead or legal costs you might have to incur because of the new Dodd-Frank legislation.
We had a really – identified a certain number Ross, but we know it is going to be – any increase will probably after ahead whether we do a lot of outsourcing to get some experience, or we will add staff to comply with some of those requirements, but we really have not put our pencil to it yet and figure out an exact dollar but it is a – but it is going to be more than what we would like to see, I'm sure.
Ross Habermen – Haberman Management Crop
And, what is your expectations in terms of, let's just say on $0.5 million for that intake, how you going to try to offset some of that increased cost, whatever it might be.
I think as Don and I, as we were talking before, I think that we're going to have two revisit our fee structure overall, if the additional cost is going to be put on us for compliance with some of the new regulation, we're going to most likely have to look at offsetting a lot of that via fees.
And I think another area, as we kind of alluded to as with our new core operating system as we start to really understand and utilize the benefits of that system and the conversion we let through. We hope to get more efficiency from the operation side as well.
Ross Habermen – Haberman Management Crop
Okay, thank you guys.
Okay, thank you very much for joining us this morning, we are seeing no more questions. We appreciate your interest and look forward to talking with all of you in the future. Thank you.
The conference is now concluded, thank you for attending today's presentation and you may now disconnect.
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