UnionBanCal Q3 2007 Earnings Call Transcript

UnionBanCal Corp. (UB)

Q3 2007 Earnings Call

October 19, 2007 11:30 am ET

Executives

Jack Rice - Head of IR

Phil Flynn - Vice Chairman and COO

David Matson - Vice Chairman and CFO

Analysts

Manuel Ramirez - KBW

Andrea Jao - Lehman Brothers

Todd Hagerman - Credit Suisse

Brent Christ - Fox-Pitt

Joe Morford - RBC Capital Markets

Gary Townsend - FBR Capital Market

Heather Wolf - Merrill Lynch

Presentation

Operator

Good day, ladies and gentlemen, I'd now like to introduce your host for today, Head of Investors Relations, Mr. Jack Rice. Sir you may begin.

Jack Rice

Thank you and welcome to the UnionBanCal Corporation Third Quarter Earnings Call. With me here today is Phil Flynn, Vice Chairman and Chief Operating Officer of the company and David Matson, Vice Chairman and Chief Financial Officer. David Anderson, Executive Vice President and Controller, he is here as well.

Mr. Matson will review third quarter's financial performance, and provide guidance for fourth quarter 2007. Mr. Flynn will then provide details about performance on our loan and deposit activities, additional details concerning credit quality, and conclude with brief comments about current economic conditions in our markets.

Please note that the press release for the quarter ended September 30, 2007 was released yesterday after the close of market and has been posted in the Investor Relations portion of the company's website at www.unionbank.com.

That press release contains certain non-GAAP financial measures which we will discuss during today's call, together with the most directly comparable financial measures calculated in accordance with GAAP and the specific items excluded in the calculation of each non-GAAP financial measure.

Before we begin, this conference call includes forward-looking statements that involve risks and uncertainties. Forward-looking statements can be identified by looking at the fact that they do not relate strictly to historical or current facts. Often they include the words believe, expect, anticipate, intend, plan, estimate, project, continue, forecast, or words of similar meaning or future or conditional verbs such as will, would, should, could, or may. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. A complete description of the company, including related risk factors, is discussed in the company's public filings with the Securities and Exchange Commission.

All forward-looking statements included in this conference call are based on information available at the time of the call and the company assumes no obligation to update any forward-looking statement.

Thank you and now Mr. Matson with third quarter's financial review and fourth quarter's guidance.

David Matson

Thank you, Jack, and thank you all for joining us in the call this morning. Third quarter earnings from continuing operation was a $1.08 per share. This includes state income tax expense of $0.06 per share related to prior periods. Excluding this item, earnings were a $1.14 per share.

Compared with second quarter, our total revenue rose 0.5% and non-interest expense was down 1%. Net interest income was down slightly on a sequential quarter basis primarily due to an 8% decline in average non-interest bearing deposits, Net interest margin decline by 6 basis points.

Despite the ongoing deposit mix shift average non-interest bearing deposits were still 33% of total deposits and our annualized average all-in cost of funds remained comparatively low at 278 basis points for the quarter.

Sequential quarter loan growth was a 7% annualized and distributed across the portfolio. Non-interest expense was down 1% compared with the prior quarter. Salaries and employee benefits were down $15 million. Our professional services expense was up $6 million, primarily related to compliance expense. Asset quality continues to be strong with net charge-offs in the quarter just $2 million and non-performing assets just 10 basis points of total assets at quarter end.

At the same time, we increased the provision for credit losses to reflect some loan grade migration in the real estate portfolio as well as strong loan growth towards the end of the quarter. At quarter end, the tangible common equity ratio was a very strong 7.79%. The ratio declined 8 basis points from June 30 primarily due to unrealized losses in the CLO portfolio, which are recorded directly to stockholders equity.

Now I will provide our financial forecast for the fourth quarter of 2007, which assume 125 basis points reduction in Fed funds rate. Our current expectations for the fourth quarter earnings per share is a $1.07 to $1.12. Compared to the third quarter 2007 we expect net interest income to increase approximately 1%.

We expect a decrease in average non-interest bearing deposits of approximately 2% to 4%. We expect substantially all of the decline to come from title and escrow deposits. Average total loans were expected to grow between 1% and 2%. Excluding interest rate buy down loans, average loans are expected to increase between 2% and 3%.

We expect non-interest income will decline 2% to 4% compared with the third quarter, with most of the decrease due to lower private capital gains and lower income from trading account activities. We forecast non-interest expense of approximately $420 million for the quarter. This represents an increase of approximately 3% compared to the third quarter, but it is a normal run rate for the company as we've previously discussed.

We estimate total provision for the credit losses to be approximately $15 million for the quarter. We estimate an effective tax rate of approximately 34% for the fourth quarter.

Our fourth quarter forecast assumes approximately $138 million average shares outstanding. Management's current objective will be to accomplish a return to a more robust share repurchase levels in the fourth quarter, but the timing and the amount will be subject to market and other financial conditions, and to the customary ongoing review of the share repurchase levels by the company's of Board of Directors.

Now I'd like to pass the time to Phil.

Phil Flynn

Thank you, David and good morning everyone. This morning I'll provide additional highlights of the third quarter's financial results and more detail as to our outlook for the fourth quarter. I'll discuss the quality of our credit portfolio, which as if you've seen and in comparison to other bank results announced this past week looks very good. I'll also discuss the minimal effect that recent credit market disruption has had on us.

We achieved earnings from continuing operations adjusted for prior period tax effects of $1.14, within the guidance range we provided in July. Loan growth continued to be healthy across all sectors of our portfolio. Expenses declined as our focus on expense management continued and credit quality continues to reflect great.

The quarter's results excluded several items that's disclosed in our release. Tax adjustments totaling $0.06 per share and the DOJ's corporate share related to our discontinued international corresponding banking business of $0.16 per share.

I'd now like to give you some summary details regarding the recent credit market turbulence and its effect on us. As you know, we satisfy most of our funding through our deposit products and supplement our needs in the wholesale markets, where we were able to fund the bank throughout the period of market disruption at our normally attractive spreads.

By the way, we don't participate in the asset-backed commercial paper market or special investment vehicles and we don't have any off balance sheet converts.

Our CLO portfolio is approximately $2 billion consists of 98% A-rated or better investments, none of which has been downgraded in this period of market turmoil. There is no subprime or other mortgage exposure in the CLOs that make up the portfolio. They invest exclusively in corporate loans.

We've taken a mark against equity for unrealized losses against our CLO exposure in the quarter of a $153 million, which partially contributed to a reduction to a tangible equity ratio of 8 basis points. The reduction in value of the portfolio is totally related to widening credit spreads not fundamental deterioration in the CLOs themselves.

In some, we felt few negative effects of the credit market disruptions and the quality of our loan portfolio remains solid. In fact, we've begun to see widening spreads in some sectors of our earning assets, and we expect this to positively effect results going forward. This is particularly true in our residential mortgage portfolio, which I'll discuss shortly.

Moving to third quarter results, net interest income decreased slightly due to the expected shift of non-interest bearing to interest bearing deposits. The negative effect of the deposit shift was partially offset by strong core loan growth of almost $1 billion of 3%, excluding IRBD loans.

The dramatic slowing in real estate activity had and will have a big impact on our title and escrow business with lower deposits, IRBD loans and vendor bills. Third quarter deposits declined on average about $400 million and IRBD loans about $500 million. The negative effect on net interest margin of lower title and escrow balances is largely offset by the decrease in IRBD loans.

Excluding the title and escrow decrease, non-interest deposits declined about $800 million, which was about $200 million more than we had expected. Core interest bearing deposits increased about $250 million and the remainder of our funding needs was provided by other customer deposit sources and wholesale funding.

We expect average core deposits of just under $32 billion at the fourth quarter, down about 1% compared to the third. Demand deposits will be down approximately $400 million, almost entirely from further shrinkage of title and escrow deposits.

Otherwise non-interest bearing deposits will be about flat, which is positive given trends over the past couple of years. Average loan growth during the third quarter exceeded our expectations and was spread across all business lines.

Excluding the expected decline of about $500 million in IRBD loans, total average loans increased by $1.1 billion. This increase was comprised of a $600 million increase in residential mortgages, approximately $200 million increase in commercial loans, and $250 million increase in commercial real estate loans, with the majority of that being in the commercial mortgage area.

These increases were driven primarily by decreased competition in the residential mortgage markets, a result of so many formerly active lenders being out of the market and a generally healthy environment for our commercial customer base.

Residential mortgage spreads on new originations began to rise substantially in August. We continue to maintain our conservative underwriting standards in the residential mortgage area. The average loan to value of third quarter originations was 66%. The average debt to income was 34% and the average FICO score rose to 753.

Our total residential portfolio at the end of the third quarter was nearly $13.5 billion, but delinquencies were just $33 million or 39 basis points. This compares to the [NBA] average California prime index of 231 basis points at June 30. We had only 13 loans totaling $9 million in foreclosure at quarter end.

We've had no losses or non-accruals to-date in our $950 million home builder segment of the portfolio. Obviously, we are closely monitoring the condition of these customers. We've downgraded a number of these loans which played a factor in our increased loan loss provision.

As you know, market conditions are extremely poor. We expect further deterioration in this portfolio in the fourth quarter but we continue to expect that we will outperform peer banks.

The construction portfolio remains weighted towards income properties. Income property portfolio is stable with only minor indications of slowing absorption levels. The office property market in Orange County is getting weaker. However, our exposure in this market is only about a $100 million.

We continue our strategy of lending to high quality financially strong developers and this has kept a stress on our real estate portfolio at a minimum. For the fourth quarter excluding IRBD loans, we expect average loans to increase about $1 billion or 2% to 3%. We anticipate a further $300 million reduction in IRBD loans. Roughly two-thirds of the growth is expected to occur in residential mortgages, where we will continue to benefit from reduced competition. The remainder of the loan growth is expected to be spread evenly amongst C&I and commercial mortgages.

Credit quality continues to be strong with non-performing assets of only 10 basis points at September 30th, up from 6 basis points in the prior quarter. Nonaccrual loans increased from a very low $30 million at June 30th to $53 million at September 30th. Much of the increase was due to a $12 million reserve security energy loan, that were well collateralized and we don't see any loss content in that loan.

We had net charge-offs of only $2 million in the third quarter, unchanged from the second quarter. The third quarter provision for credit losses including a provision for off balance sheet commitment was $20 million, an increase of $15 million from the prior quarter.

This increase was related to downgrades in the real estate portfolio and substantial point-to-point loan growth. Non-interest income continues to track better than our expectations. Total non-interest income reflected a solid increase of nearly 3%. A decline of nearly $8 million in private equity investment gains was offset by an increase of $8 million in customer hedging activities, mostly interest rate swap transactions.

In addition, we had a $4 million gain resulting from the sale of our minority interest in check cashing entity, we were formally affiliated with. As we discussed for several quarters now, expense management continues to be an important focus for us. Total non-interest expense was $408 million in the third quarter, substantially better than the guidance of approximately $425 million we provided in July.

Non-interest expense during the third quarter declined due to lower than expected staff expense, professional fees, and others outside services. We expect non-interest expense to remain at our previously guided target of about $420 million in the fourth quarter as some of the benefit we saw last quarter was related to timing issues and other one-time events.

For the 12 months period through August 2007, employment in California rose by 1%, down from the nearly 2% from the prior 12 months. However, we believe this slow down was previously limited to housing related industries. Home sales have slowed substantially over the last quarter and we expect further deterioration in absorption rates as the supply of new and existing homes for sale far exceeds demand.

Growth in the overall California economy weren't steady throughout the state and is expected to continue in 2008. Going forward, we expect to maintain solid loan growth and more stable deposit rates, focused expense discipline and despite the difficulties in the housing markets, overall, strong credit quality.

Thanks. And we'll be happy to take your questions now.

Question and Answer Session

Operator

Thank you. (Operator Instruction). Our first question comes from Manuel Ramirez from KBW. Your line is open.

Manuel Ramirez - KBW

Hi. Good morning.

David Matson

Hi, Manny.

Manuel Ramirez - KBW

On the provision, I apologies, I didn't catch David's guidance on the fourth quarter provision.

David Matson

$15 million

Manuel Ramirez - KBW

15. Thank you. And then of the provision that you did recognized this quarter about -- what was the split between the impact of loan growth versus the impact that it integrates on the portfolio, roughly speaking.

David Matson

There's a lot of ups and downs in the way we calculate the reserve. But I would say, it would be fair to say roughly half and half.

Manuel Ramirez - KBW

Okay. Great. And the final question just out of my curiosity, who the heck would default on an energy loan with oil prices and other energy prices [further out]?

David Matson

It is hard to imagine. Isn't it? Which is why, we really don't think, we have a lot of loss in there.

Manuel Ramirez - KBW

Okay. I was just curious. All right. Thanks.

Operator

Our next question comes from Andrea Jao from Lehman Brothers. Your line is open.

Andrea Jao - Lehman Brothers

Good morning, everyone.

David Matson

Good morning.

Phil Flynn

Hi, Andrea.

Andrea Jao - Lehman Brothers

Just a couple of quick question on non-interest income. Trading account activity, that line item is new in terms of your earning release disclosures. Could you tell us what goes into there? And did you consolidate the foreign exchange line in to other?

David Matson

Yeah. We've got foreign exchange, interest rate swaps. That kind of stuff comprises that line. It's not proprietary trading. This is customer activity.

Andrea Jao - Lehman Brothers

Okay, got you. And the strength of $8 million increase was due to?

David Matson

We had really strong interest rates swap activity for our customers.

Andrea Jao - Lehman Brothers

So, I guess in the fourth quarter that may not necessarily be there?

David Matson

Probably not at that same level, Andrea. We had one very large transaction for cross quarter project finance skill that we agented.

Andrea Jao - Lehman Brothers

Okay. And then the $5.7 million link quarter increase in other; I guess that's towards a gain, it sounds like, check cashing.

David Matson

That's right. Yeah. $4 million gain on our minority sale and the mix check cashing entity. Okay, that company got sold.

Andrea Jao - Lehman Brothers

Okay. And the $1.2 million increase in merchant banking? The strength there was due to?

David Matson

Syndication fees.

Andrea Jao - Lehman Brothers

Okay. And these come back down or remain good do you think in coming quarters?

David Matson

Syndication fees will be strong in the fourth quarter again. Like we said, swap activity will still be strong, but probably not at those third quarter levels, because we have that one very unusual transaction. Private capital gains will be quite a bit lower than they were in the third quarter. But remember, we are already had about $40 million for the year and which I think is extraordinary.

Andrea Jao - Lehman Brothers

Yeah. Okay. Thank you very much.

Operator

(Operator Instructions). Our next question comes from Todd Hagerman from Credit Suisse. Your line is open.

Todd Hagerman - Credit Suisse

Good morning, everybody. Phil or David, I didn't quite catch the comments on the capital management of capital buyback David that you made. I was just wondering if you can just elaborate a little bit just in terms of top process there. How you have been thinking about it? I noticed, it has been relatively modest for the last couple of quarters. And again I am just going to get some better detail or color there in terms of how you're thinking about capital these days.

Phil Flynn

Sure. Thank you, Todd. Well, in the third quarter, we had very delight activities there and that was primarily because of the regulatory overhang that we experienced. And therefore, we didn't want to do an often lot during that period of time. And then in the fourth quarter, we planned to resume our activities, although with these conditions and we have a normal Board Of Director's approval that we go through and it's a little too early for us talk guidance on that topic.

Todd Hagerman - Credit Suisse

Okay. How are you thinking with respect to regulatory issues as well as just the credit environment so forth and some may argue that as credit churns perhaps you -- that's a time when you want to maintain that fortress balance sheet if you will. Can you elaborate just a little bit more just in terms of how you think about the just the overall environment with respect to your balance sheet?

Phil Flynn

We are relative to the regulatory issue in the third quarter and that's behind us, and so, its not an impact right now. And then in terms of the financial and other circumstances, we think we have a very strong credit condition and that's a part of course of our thinking but that's not the driving force right now.

Todd Hagerman - Credit Suisse

Okay. That's helpful. Thank you.

David Matson

Todd, let me just elaborate just for one second on that. We have an extraordinary amount of capital right now. We are well reserved and we have a very strong portfolio as far as credit quality goes. So, we have plenty of rooms as we think about what we want to do on capital management. On the regulatory side, we have paid thus far in last quarter -- we are in the midst of satisfying our regulators in regards to fees of the system. We have a lot of work to do there and we are going to continue to do a lot of work. But from a capital point of view, it shouldn't really be an impact for us.

Todd Hagerman - Credit Suisse

Perfect. Thanks.

Operator

Our next question comes from Brent Christ from Fox-Pitt. Your line is open.

Brent Christ - Fox-Pitt

Good morning. Could you talk a little bit more just in terms of the $950 million in home builder exposure and to the extent, do you have any reserves satisfied for that portfolio or if reserves were specifically added during the third quarter?

Phil Flynn

Sure. This is Phil. We of course have significant reserves satisfied against this, because we think this is the weakest part of our portfolio. And as we've said probably half of the increase in the provision or half of the $20 million provision related is specifically to downgrades in that portfolio. We continue to believe that's the quality of the sponsors of this project is very high and we don't think we are going to have a huge amount of problems out of this. That said, we are sitting with no non-accruals and to-date no charge-offs, that will undoubtedly change with what's going on in this market.

I mean there's going to be significant deterioration and at some point, problems are going to flow down through non-accruals and perhaps even to charge-offs. I don't think that $950 million is going to rise to a level that's going to be really significant for our company. You can already see the contracts between the quality of our home builder portfolio and results that you have seen from other mid-sized regional banks that are active in the space, who have already increased their non-accruals substantially and are positioned substantially compared to us and our exposure here.

Brent Christ - Fox-Pitt

And I guess is there some additional build from that portfolio contemplated and can they get your fourth quarter provision guidance is a little bit higher than what is indicated or what was implied in the past based on your previous guidance is their additional field kind of assume for their portfolio specifically in the fourth quarter or may be into 2008?

Phil Flynn

Yes, we are not into 2008 guidance yet but certainly the $15 million we are thinking about in the fourth quarter is largely driven right now by what might happen to the home builders. We don't know for sure what's going to happen, but given the very, very slow sales activity in the market particularly in California it's very prudent to assume we are going to putting more reserves on it.

Brent Christ - Fox-Pitt

And can you spend a little bit of time just may be in terms of the geographic concentration and size of that build of portfolio in terms of the people you are doing business with?

Phil Flynn

Sure. I am not going to discuss customers, although, what I can tell you and I have said it before is that many of our home builders are large private companies that are extraordinarily well capitalized. We do have some exposure to the public home builders so that's not the bulk of our portfolio. As far as geography, I will give you some rough percentages about a third of it is up in the San Francisco Bay area probably about 20% is in the Inland Empire, 15% or so is in LA and Orange County, about 10% in San Diego, less than 10% is out of state and rest is scattered around, so it's quite dispersed geographically.

Brent Christ - Fox-Pitt

Okay. That's hopeful. Thanks a lot.

Operator

Our next question comes from Joe Morford from RBC Capital Markets. Your line is open.

Joe Morford - RBC Capital Markets

Thanks. Good morning, Phil

Phil Flynn

Hi, Joe.

Joe Morford - RBC capital Markets

Just, following up actually on the last few questions. First just, I guess on the home builders, you've talked about seeing some migration in the portfolio, overall it's still holding that relatively well. What is -- some of the kinds of issues that you are seeing so far that's causing this migration and the additional provisioning right now?

Phil Flynn

Well, there are all still current because none of them are on non-accrual. It's all about -- reappraisals, loan to values, things getting tight as sales have slowed and we are going into reappraised properties on a constant basis. So as things are getting tighter, clearly we are downgrading loans and setting aside reserves.

Joe Morford - RBC capital Markets

Right. Okay. And then the other follow-up is on the, I guess David on the capital management fund. Is there -- since like it's been a while, since you've bought back any stock from the majority owner, the Japanese, is that still something that's considered from time-to-time and so that we may look to see?

David Matson

Joe, every quarter we take a look at all of the options in terms of the capital management and that how [is one of the once] that's on the list.

Joe Morford - RBC capital Markets

Okay. Thanks.

Operator

Our next question comes from Gary Townsend from FBR Capital Market. Your line is open.

Gary Townsend - FBR Capital Market

Thank you, Phil. David hi.

Phil Flynn

Hi, Gary.

David Matson

Hello.

Gary Townsend - FBR Capital Market

Phil, it occurs to me that I mean I have been following the company for quite a few years now. You've been CEO for three to four, it seems. Could you talk about your vision for the company and where for you'd like UnionBanCal to be in about five years?

Phil Flynn

Sure. First of all so, I don't want in get trouble with my boss. I am actually the COO not the CEO.

Gary Townsend - FBR Capital Market

Yes, of course.

Phil Flynn

I want to remain in quite here for at least a little awhile longer.

Gary Townsend - FBR Capital Market

I beg your pardon.

Phil Flynn

Our vision for the company continues to be a customer focused premier regional bank here in California and other markets that we serve. We strive to have a well balanced bank from a portfolio point of view with a well balanced loan portfolio balance in our deposits, a lot of focus on growing on non-interest income and having this [clinic] sense management. But you know we really are focused on being a customer relationship driven company and that's what we work on everyday here.

Gary Townsend - FBR Capital Market

Could you give an update please on the retail bank efforts?

Phil Flynn

Sure. As we talked about we're in the midst of a very great transformation of how we think about our retail bank to become even more focused on certain customer segments than we have been to continue providing outstanding customer service. We're on actively opening de novos as we said we were going to open 10 this year and in fact we anticipate opening 10 and then actually quite a few in the first quarter of next year probably another six. So we've got about in the next four to five months probably 10 de novos that we'll be opening, so we're expanding our footprint throughout California right now and we're satisfied with the work that's going on in the segmentation of strategy that we have described before. But as I've also said it's a long process to transform, a large operation like we have and refocus how we sell and service our customers. So it will still be a while until you see results from that.

Gary Townsend - FBR Capital Market

I know you have recently opened branches in Northern California, the ones that you have planned for early next year in that same geography or where?

Phil Flynn

You know they are spread all over; we had put out a press release that we happen to be opening six over this next quarter, two up in the East Bay. We have opened several offices around Southern California and San Diego, so it kind of depends on the timing of when the property is available and when we get the branches built out.

Gary Townsend - FBR Capital Market

And how would do you measure your success with the de novo efforts?

Phil Flynn

Just like everything else, we are a very bottom line oriented company, so we have assumptions on deposit growth et cetera for these branches, unlike some banks I don't know how they do it, we can't make them breakeven in three days after we open them so it takes a while, but --

Gary Townsend - FBR Capital Market

Full week then?

Phil Flynn

Yeah, it takes couple of weeks. Anyway takes a number of years frankly in our opinion. But we track that very closely.

Gary Townsend - FBR Capital Market

Thank you.

Operator

Our next question comes from Andrea Jao from Lehman Brothers. Your line is open.

Andrea Jao - Lehman Brothers

Hello, again. Well a while back you guys did a lot of work to improve price in the company and I know that the loan portfolio now is different from when its been five-seven years ago. But to what extent if you can, what would you consider more normal ratios for [C&I ] and net charge-offs in the few coming years?

Phil Flynn

Sure, we've talked about that many times and its hard to decide what normal charge-offs would be for example because if you look back at the history of the company, back in the 2001 timeframe when we reached about a 100 basis points that was extraordinarily high on a very different and much riskier portfolio than we have today. So as I think you have heard me say before, for the C&I book lot of people would think 50 basis points over time, over the cycles on average right of course there is never any average neither higher or lower.

I think we should do better than that. I think we've done as you said a great deal of work in rebalancing this portfolio in being very disciplined about what we're doing and avoiding certain markets altogether. I think you heard me say that, the best way to manage credit portfolio is decide what type of business you're going to be in and we are very disciplined about sticking to it, since, you can often talk to yourself into any particular loan if you are not careful. So, we tried to be very disciplined about the segments that we are lending to and sticks areas where we believe we have a competitor and managing a significant expertise.

Andrea Jao - Lehman Brothers

Okay. Do you have similar ranges where you see your commercial real estate portfolios?

Phil Flynn

Well, I think that we'll see over this next year or so what kind of stress ends up going through the homebuilders that would clearly be the riskiest portion of the real estate portfolio. The commercial mortgage book, we would expect to be quite sound and have very low loss content and we expect the residential mortgage side to have potentially no loss content in it.

Andrea Jao - Lehman Brothers

Okay. Good. Thank you very much.

Operator

Our next question comes from Manuel Ramirez from KBW. Your line is open.

Manuel Ramirez - KBW

Hi again. I had a couple of questions about the mortgage business. First, I think the question related at the end of period of mortgage of balances, it looks like you probably had a lot of growth in period in and period out I just want to get the precise number?

Phil Flynn

From period end to period end and well I know we ended up at $13.5 billion at the end of September and I think we had about -- I tend to think of it averages Manny, I'm sorry.

Manuel Ramirez - KBW

Yeah. I usually do too, I was just curious given how abnormal the environment was?

Phil Flynn

Yeah I mean we had, if you give me one second I can tell you what the originations were.

Manuel Ramirez - KBW

Okay.

Phil Flynn

In the third quarter, we originated, I don't have it right here. I am sorry.

Manuel Ramirez - KBW

Okay.

Phil Flynn

You can follow-up with Jack and get those exact numbers.

Manuel Ramirez - KBW

Okay. I will, I will do that. But do you think for the period that was $13.5 billion?

Phil Flynn

I know it was $13.497 billion actually.

Manuel Ramirez - KBW

Okay. I appreciate that. And your strategy in the business obviously the risk in the environment as increased to little bit here. Particularly on the no doc stuff, what kind of steps you are taking to make sure that you are not adversely selected since family neighborhood mortgage brokers are certainly looking for places to put loans, that [tends to] like may be took 1 point in the recent past. Is there anything in particular that you guys have been looking at particularly in that area not the full block stuff?

Phil Flynn

Absolutely, I should tell you that. I think as you are aware the regulators have put in place guidelines which they expect then to comply to shortly on nontraditional mortgage product. So, we are not doing no doc loans anymore. Even though we haven't fully implemented the NTM guidelines which we don't have to right this second we are working toward doing that towards the end of the year.

Manuel Ramirez - KBW

Okay.

Phil Flynn

So, we are not doing that. Our underwriting criteria have been toughened up to this anything across all of the products. So, yes, there would be a worry that brokers would be heading towards whatever doors are still open. The fact is we don't do business with one just comes in the door we have a select group of brokers that are on our approved list, so we don't take apps from people that we haven't been doing business with anyone.

Manuel Ramirez - KBW

Okay.

Phil Flynn

And we have been very, very disciplined in what we are underwriting this business. You have heard the stats that I gave a little while ago. I can't tell you if I sound and it's a big piece of cake with all of these numbers. We originated about a $1 billion in the third quarter and of course we had some run off from that. So the average growth was at $600 million or so.

Manuel Ramirez - KBW

Okay. And then going forward is the portfolio of a size, what do you think that it would make some sense if it's start selling from your production?

Phil Flynn

What we try to do, as I think you've heard me say is, keep the long board portfolio balanced in buckets of roughly a third. Roughly a third residential mortgage, roughly a third commercial real estate of all types and roughly a third of C&I loans, and its in around those proportions now. If the residential mortgage portfolio, were to grow into the high 30% range, which would probably only happen if we had slower loan growth in the other areas, than we would consider slowing down the growth or perhaps starting to originate the sale. We are not setup right now to originate the sale that's now our business.

Manuel Ramirez - KBW

Okay. Great. Thank you very much.

Operator

Our next question comes from Heather Wolf from Merrill Lynch. Your line is open.

Heather Wolf - Merrill Lynch

Hi. Good morning.

Phil Flynn

Good morning.

Heather Wolf - Merrill Lynch

Phil, in terms of the residential real estate markets out there. Have you seen any [contingent] into any other areas other than the Orange County office days and can you talk about maybe which products there could be contingent to going forward?

Phil Flynn

Well, we haven't really seen any to date. A lot of people would say the weakness in Orange County office market is because all those mortgage brokers and mortgage companies all imported down there and you had a bunch of empty space all of a sudden. The bigger risk clearly is that this very severe downturn in the home builder market causes things to slip into a recession both in California and nationwide. And it's hard to say what's going to happen there. Of course, there are related industries where contingent is spread I mean you can see that what's happening in the title escrow core business. I mean it's dramatically slowed down and we are expecting our balances, for example in the title business to be about half of what they were just over a year ago, which is quite an extraordinary drop. We are not losing our customers it's just that their volumes and activities have slowed down so much.

Heather Wolf - Merrill Lynch

Okay. And what about [shut off] do you seeing any issues there?

Phil Flynn

No, not to date.

Heather Wolf - Merrill Lynch

Okay.

Phil Flynn

But, all of that could happen, depending on what happens with sales, as you will know.

Heather Wolf - Merrill Lynch

Okay. Great. Thank you.

Operator

Our next question comes from Andrea Jao from Lehman Brothers. Your line is open.

Andrea Jao - Lehman Brothers

Hello, again. It looks like. Hello, can you hear me?

Phil Flynn

We are here. We hear you, Andrea.

Andrea Jao - Lehman Brothers

It looks like deposits will remain under depression, pricing will remain very competitive, and loan growth remains good. So, looking into 2008, that tells that the margin will remain under pressure? Could you talk about that a bit? And then, what offset or what must we expect from upwards of pricing of some buckets of assets?

Phil Flynn

Sure, well, stay tuned for '08. I am not going to give any detail on that. But I could tell you that I think our deposit situation is starting to stabilize, believe it or not. We had the big drop from the second to the third quarter on the one customer that we've mentioned last call, during '08. We've had a big drop in title escrow. We expect another big drop in title escrow deposits, but pretty flat in the fourth quarter, other than the title escrow deposit drop. In regarding the title escrow benefits are somewhat offset or largely offset by IRBD loans and vendors bills, et cetera. So, the impact on us is not nearly the same as losing $400 million of business TDA versus losing 400 in title escrow.

On that credit spread side, we are starting to see widening. It may take a while for that to flow into the portfolio but we have a lot of LIBOR loans there because of the situation with LIBOR and credits spreads in general are looking pretty good. Our cost of funds overtime is going to start moving down with rate cuts.

So, I wouldn't necessarily expect, to continue to see the type of margin compression that we have experienced in the last two years. But we will be doing a lot of detailed work, and stay tuned and come back in three months.

Andrea Jao - Lehman Brothers

Okay. Cool thank you so much.

Operator

(Operator Instructions). Your next question comes from Brent Christ from Fox-Pitt, you line is open

Brent Christ - Fox-Pitt

Good morning again, just one housekeeping issue. What was the absolute dollar level of the title escrow deposits at the end of the quarter?

Phil Flynn

At the end of the quarter, it isn't very meaningful because those deposits move around a lot.

Brent Christ - Fox-Pitt

Or on average?

Phil Flynn

The average for the third quarter was about $1.6 billion down from a little over $2 billion in the second quarter and we are expecting it to drop down toward the $1.2 billion range in the fourth.

Brian Christ - Fox Pitt

Okay. Thanks a lot.

Operator

(Operator Instructions). I am not showing any further questions.

Phil Flynn

Okay. Thank you and would you please give the recordation and the availability of the call to the audience please.

Operator

Certainly. Ladies and gentleman this conference will be available for replay after 12 PM today through October 26, 2007 at 11:59 PM. You may access the AT&T teleconference replay system at this time by dialing 1-800-475-6701 and entering the access code 889677. International participants dial 320-365-3844. Those numbers are again 1-800-475-6701 and 320-365-3844, access code 889677.

Jack Rice

Thank you all for joining the call and any follow-up questions can be addressed to me. Thanks a lot.

Operator

That does conclude our conference for today. Thank you for your participation and using AT&T executive teleconference. You may now disconnect and have a wonderful weekend.

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