SWS Group F1Q08 (Qtr End 9/28/07) Earnings Call Transcript

SWS Group Inc.(SWS)

F1Q08 (Qtr End 9/28/07) Earnings Call

November 6, 2007 10:00 am ET

Executives

Don Hultgren - CEO

Ken Hanks - CFO

Dick Driscoll - Chairman and CEO of Southwest Securities FSB

Bill Felder - President of SWS Group and CEO of Southwest Securities.

Stephanie Doty - VP, Corporate Communications

Analysts

Kevin O'Keefe - Jefferies Asset Management

Tripti Prasad - Sidoti

Presentation

Operator

Good morning, everyone and welcome to the SWS Group Inc. Quarterly Conference Call and Webcast. This is Stephanie Doty of SWS Corporate Communication staff. We're pleased that you could join us today.

The quarterly earnings press release can be found on our site at swsgroupinc.com or on the Yahoo finance Website under SWS news. Market professionals on our distribution list should have also received the slides for today's call via e-mail. If you would like to be added to our e-mail list to receive press releases or to be notified of future quarterly calls, please call 214-859-9335.

This conference call is being webcast live on the Internet along with the accompanying slides at swsgroupinc.com, where it will be archived for the next 30 days. (Operator Instructions) Those participating the Internet can ask questions from the link provided on the webcast page or by e-mailing them to questions at swsg.com.

This presentation contains forward-looking statements regarding the Company's future overall performance. You are cautioned that any forward-looking statements including those predicting or forecasting future events or results, which depend on future events for their accuracy and by the projections or assumptions or expressing intent, beliefs or current expectations of the Company or management, are not guarantees of future performance and involve risks and uncertainties.

Actual results may differ materially as a result of various factors, some of which are beyond our control. Including but not limited to, volume of trading in securities, volatility of securities prices and interest rates, customer margin loan activity, credit worthiness of our correspondent and customers, demand for housing, loss of correspondent to self clearing or as a result of consolidations or otherwise, and those factors discussed in our annual report on Form 10-K and in our other reports filed with and available from the Securities and Exchange Commission.

This conference also contains references to non-GAAP financial information, which is being presented to provide additional information regarding the Company's operations and should not be used in place of GAAP measures. The Company's press release and today's slides include reconciliations of these non-GAAP measures with the Company's GAAP results.

At this point it's my pleasure to introduce Mr. Don Hultgren, Chief Executive Officer of SWS. Don?

Don Hultgren

Thank you, Stephanie and good morning everyone; thank you for joining us today for a discussion of our first quarter results for fiscal year 2008. As I first start by introducing the participants in addition to myself. We have Ken Hanks who is the Chief Financial Officer of SWS Group, John Holt who is the President and Chief Executive Officer of Southwest Securities FSB, and Jim Ross who is the President and CEO of Southwest Securities and SWS financial.

The agenda today, is as follows. I will make some remarks and provide an overview of the first quarter, review some noteworthy items from that quarter and touch on some of the important events since our last conference call. Then Ken will provide a more detailed review of the first quarter results, followed by John who will provide an update on our activities at the bank. When John finishes, I will discuss our market position and our three primary growth initiatives. Finally when that is over we will open it up for questions and as you heard it's different this time (Operator instructions).

Let's begin with the first quarter overview. Revenues in the quarter decreased from $116 million last year to $113 million this year. Income from our continuing operations also decreased from $10.1 million to $7.7 million. Earnings per share in the first quarter decreased from $0.38 last year to $0.28 this year. We ended the quarter with a book value per share of $11.33. Last year we received a $0.02 per share benefit from our position in NYX. This slide shows that netted out of the results it makes the comparison $0.28 versus $0.36.

Beginning with noteworthy items, we experienced strong commission revenue growth, 17% year-over-year. The strongest areas of this growth were municipal distribution, taxable fixed income and our independent contractor group known as SWS Financial.

Clearing revenue was also up 14% year-over-year, despite the fact that we still had the Miller Johnson business in the first quarter of last year.

Our ticket volumes were up, from both general securities and high volume traders. The customers from Ameritrade were also receiving reduced introductory ticket charges in the first quarter of last year. Fortunately, we got out in front of the volatile fixed income market by reducing our fixed income inventories early.

Total average fixed income inventories fell from a $128 million in last year's first quarter to $70 million in this year's first quarter. That's a decline of 45%. We were even more aggressive with our mortgage asset-backed securities, reducing them 70% from $82 million to $24 million.

Finally, a couple of our businesses, that can have [positive] results, had a positive impact on last year's first quarter. It included about $4 million in gain through two transactions. An M&A Project closed by our corporate finance team in a largely restructuring transaction that are taxable fixed income department. Our corporate finance group has a good pipeline and should help us out at some point this year. The large fixed income restructuring opportunities however may be hard to come by, in the current market environment.

In terms of important events, it has been a very busy period, after management changes here at SWS. Although we issued press releases about the changes, I would like to highlight them here. Our new Head of Clearing is now on the team. I recognize the process was long, but I think we brought on an outstanding individual.

Obviously the impact of his leadership will not materialize overnight; I do however think he brings the right combination of entrepreneurship, organizational structure and energy to the job.

Anyone who has followed SWS over the past years recognizes that the members of our management team did a great job, building and growing the organization. I very much appreciate the contributions made by all of them.

Now we are embarking on our new journey in which key rolls with the firm have been assumed by talented people who have risen successfully through the organization. We have a new President and CEO of Southwest Securities and new President and CEO of Southwest Securities FSB, our bank. These people bring new skills and energy to their jobs. It's an exciting time here.

We have three growth strategies grow our clearing, grow the brokerage firm and grow the bank. Today, each of these areas are benefiting from new perspectives and focus from new managers. Our three growth strategies are unchanged, but they are being executed by individual who have outstanding backgrounds both here and in other firms and show tremendous promise for the future. It is exciting.

Finally most of you were aware that the industry is undergoing a new consolidation. In that way Southwest Securities office is an outstanding platform for account executives to practice their trade. The broker is our customer. It's our job to provide the broker with the necessary tools to care for his or her clients. We do just that.

Our account executives are treated as the professional that they are. They are experts and we are the facilitators. Our account executives get the attention and resources they need to provide their investing customers with the service that they deserve. An increasing number of professionals are recognizing this fact of the Southwest Securities platform. Ken, will discuss our broker account in his comments.

But our PCG team has attracted six more advisors since the end of the quarter. This should be good growth year for us in retail, as more and more advisors understand how we do business.

With that Ken I’m going to turn it over to you.

Ken Hanks

Thanks, Don. Good morning everybody. Today I'd like to spend a few moments discussion our usual quarterly financial and operational data and then focus on our segment results.

First on the income statement. Year-to-date net revenues, that is operating revenues plus interest revenues, less interest expense were down by $3.4 million or 4.8%, while pretax earning were down by $2.8 million or 19%. Total operating revenues, that is revenues excluding interest income, were down by 6.3% or $2.9 million from the previous year for the first quarter. I will think about each income statement line item a little later in the presentation.

Net interest income that is interest income less interest expense was down by 2% or $490,000 for the quarter. Finally operating expenses, which exclude interest expense were down by $621,000 for the quarter.

Turning to a review of individual operating revenue items, net revenues from Clearing were up $280,000 or 9% for the quarter. In the quarter we've processed $7.3 million trades, up from $4.4 million in the same quarter a year ago.

General securities tickets were up by 19% while day trading customer volume was up 67%. Revenue for ticket in the September 2007 quarter was $0.46 versus $0.59 per ticket in the same quarter last year. This change is primarily attributable to the $2.8 million additional volumes form day traders in the third quarter over last year.

Commissions were up $3.2 million or 17% in the quarter as virtually all business units posted improved commission revenue over the same quarter last year. Commission revenue was up $1.5 million in our retail brokerage segment due to the improved productivity of our rep. The institutional segment also posted improved commission revenue primarily driven by improvement in volume in fixed income markets versus the first quarter of last year.

Investment banking and advisory fees were down slightly in the quarter primarily from reduced fees in corporate finance. Last year corporate finance collected a $1.2 million fee on a single M&A transaction in the first quarter. We had no such transactions this year. The decline from corporate finance was partially offset by increases in public finance fees and increased fees from advisory business.

Net gains on principal transactions were down by $6.9 million from last year, several items created this variance. The taxable fixed income business reported a $2.7 million gain last year on a commercial mortgage-backed security restructuring transaction. Additionally, general trading profits in taxable fixed income were up by $1.5 million versus last year, also negatively impacting this line was our NYX stock.

Last year we recorded $814,000 in gains on the stock, while this year the increase in value is recorded in other company heads of income in the equity section of the balance sheet.

The final significant variance relating to earnings on our reserved assets, last year we had part of our reserved assets invested directly in Treasury bill, therefore we recognized $884,000 in gains on the Treasury bill. This year all of our reserved assets are invested in qualified interest bearing cash account, so there are no gains, only interest earnings.

Other revenue is up $770,000 for the quarter, primarily due to earnings on the Venture Capital Investments in the fiscal '08 quarters versus the loss on these investments in the fiscal '07 quarters. Net interest revenue, which is interest revenue less interest expense, of $23.6 million was down 2% from last year's quarter with the small increase in net interest at the bank, offset by 5.7% decline in the interest revenue on the brokerage side.

Average margin balances in the customer side of the brokerage business of $292 million, are up 5% from the previous quarter but are down 12% from the same quarter last year. Last year's quarter included approximately $21 million in marginal lending to customers of our formal client in JFK.

Credit balances are down from both June and last year but our stock loan is up for both periods. The bank's average loan balance was down 1% over the June quarter, but was up 12% over the prior year. Most of the growth over last year came from the commercial and commercial real estate business, which has been a focus for the last year or so.

We have seen a slow down in the general construction and loan business with the correction in the housing market, but we are benefiting from our competitor's departure from the warehouse lending business. These balances are up 14% from last year and it continued to grow into the second quarter.

Turning to operating expenses, operating expenses were down 621,000 from the prior year's quarter, while variable compensation expense was down almost $1.2 million for the quarter, increased headcount at the bank led to higher fix compensation expense for an overall decrease in compensation of $620,000.

Increased maintenance expenses for CSS as well as expenses associated with bank branch expansion led to a $1.2 million in occupancy and equipment cost. Other expenses were down $1.3 million due to reduced legal expenses and accrual as well as reduced loan loss allowance [expenses] with the bank.

The next slide represent our presumed operating result by segment. Our first segment is Clearing. This business encompasses our share of all of the fee revenue collected from our correspondents or their customers, as well as the net interest income on correspondent and correspondent customer accounts.

For the fourth quarter this segment earned $4.5 million, up slightly from $4.4 million last year. Volume increases led to the improvement in revenue for this segment, as well as additional income from the Ameritrade correspondent as their introductory fee discounts has ended.

We're pleased with this comparison, as last year's quarter include revenues and profits from [JFK] formerly one of our largest customers. It was purchased last December of '06.

Next retail segment encompasses our private client group as well as our independent contractor brokers that are housed in SWS Financial Services. This segment also includes the product lines that directly support these two sales forces. Our growth efforts over the past several years, produced continued improve results quarter-over-quarter with profits up $254,000 or 9%.

The institutional segment consists of our brokerage businesses that service institutional customers, including fixed income sales and trading, public and corporate finance, equity and portfolio trading, as well as stock loans. Net revenue for this segment, was down 30% for the quarter as all business units in this segment had down quarters.

Taxable fixed income has a largest variances primarily related to the large commercial mortgage transactions included in last year's first quarter discussed earlier. Corporate finance has a next largest variance as a current quarter included, and completion of no large transactions.

Stock loans were down probably due to a two basis points drop than the average spread in that business. The other segment includes the corporate investment as well as the unallocated corporate administrative expenses. This is where we recorded the changes in value of NYX last year, the results of our Venture Capital Investment, as well as the administrative cost of accounting, legal and other corporate shared services.

On an annual basis excluding fluctuations in our corporate investment we have budgeted this segment to be $30 million in net expense. Primary changes this year over last year, include the gain of our joint venture investments that posted a loss last year, offset by the gain we reported last year on NYX.

Lastly, I would like to discuss a few operating statistics. Tickets processed increased 40% from the immediately preceding quarter, as well as the large (inaudible) increase from last year. The employee count is up 20 from last year; the majority of the increase is revenue producing employees primarily at the bank.

Our next slide presents average loans, deposit and capital balances at the bank. We've also highlighted the amount of deposits provided to the bank by brokerage customers, which averaged $716 million in the first quarter versus $579 million last year. Our reserve to loan ratio is 72 basis points while our percentage of nonperforming loans to total loans is up to 2.31%.

Net charge-offs were negligible during the quarter, our net interest spread in the quarter was down 88 basis points primarily due to excess deposits invested in low yielding investment vehicles.

I would now like to turn it over to John Holt, the CEO of Southwest Securities FSB, our banking subsidiary.

John Holt

Thank you Ken, I would like to update our listeners on how the market is impacting the bank. Our bank is composed of three primary revenue streams, one is community banking, commercial lending which includes our SBA and mortgage. Two, is our residential construction lending and three, is our warehouse lending and mortgage lending.

Starting off one, community banking and commercial lending continues to produce strong results with two new banking centers coming in line in fiscal 2008. Waxahachie is a community south of Dallas that the bank will be converting a loan production office to a full-service bank and the other location is [Southway], which is a community north of Fort Worth where we'll be converting a loan production office to a full service bank also.

Residential construction lending is the second largest revenue producer that explodes with the impact of the recent disruption at the mortgage market. Although there is no way to predict with certainty; we expect deterioration of the single-family in our loan portfolio in future quarters. Despite the national media headlines and challenging market conditions for builders and developer, the market drivers here in North Texas remain in excellent shape. The DFW net new job formation for 12-months ended August 2007 increased by 78, 800 workers as reported by the Texas Workforce Commission. A similar report issued by the Dallas Federal Reserve indicates an annual increase of 97,400 non-farm employments.

The conventional 30- year mortgage rates have declined recently to 6.4% as of Oct 11, 2007 as reported by Freddie Mac. This significant change that has impacted the housing market is a standard for mortgage qualification, not the economic drivers. The most stringent mortgage qualifications and more conservative lending culture have eliminated a large group of buyers that previously would have qualified for a mortgage on a new house.

In light of these changes in the market, the bankers trend this exposure to single-family construction lending by $15 million linked quarter. It will affect some for the absorption of the excess inventory and for our builders to adjust to the new demand levels of the qualified buyers.

Going to the third area, warehouse lending to mortgage companies, which is our third largest revenue stream. And this is a nationwide business, where we have a little over a hundred mortgage companies or plants. This is a bright spot for the bank, as several major competitors have exited this business. Several of these that have exited are Regions Bank; Washington Mutual and Banco Popular.

Southwest Securities have been in this business for 15 years and has well qualified professional management running this line of business. Our Bank tends to have more controls on price and this is predominantly a slow business, with forward commitments in place, when we fund a loan.

The Bank has approved $300 million in new warehouse plan in the last couple of months and we expect this line of business to continue to grow and be a more significant revenue producer.

We eliminated some of the credit risks by only allowing mortgage companies to baulk their loans or hedge their loans on an exception basis, for the mortgage company has significant liquidity and significant net worth in the company.

Overall, since the bank is well positioned to take advantage of the growth that is occurring in Texas and in South West.

I would like to turn it back over to Don for final comments.

Don Hultgren

Thank you John and let me remind everyone in terms of asking questions that for this call if you are on the telephone and would like to get in the queue it's *1, if you're online and would like to submit an email question, its questions at swsg.com.

Let me first barrel in on our market position. We have spent 5 years, divesting businesses and growing business to establish ourselves uniquely in three very attractive markets, where we have very competitive position.

Today we are the largest brokerage firm that is headquartered in the state of Texas. We are also one of the largest clearing firms in the United States, based on our number of clients.

And finally, we have one of the largest community bank in the Dallas-Fort Worth areas. These are three very attractive industry segments for us. And we believe we have a competitive advantage in each of these segments with opportunity to exploit that advantage and grow our firm. Our strategy to do that has been simple. Grow the clearing business, grow the broker-dealer and grow the bank.

We remained very focused on that three pronged strategy. And as I mentioned we have new leadership today in each of those areas that brings new skill sets, they have been acquired both here and at other firms in the industry.

The excitement level here about the opportunities that this leadership brings is quiet high. And I think we have excellent opportunities to grow in each of these areas.

First let me talk about clearing. We have tremendous operating leverage in clearing. Today we operate at about 10% of our capacity. And here we still bring about a 50% pretax profit margin to the pretax lines. So the name of the game is to grow our clearing business. We need to do more business with our exciting clients, we need to get new clients and we also need to be in the market trying to make acquisitions. We continue to search for acquisitions in the clearing business, as we need to unlock that operating leverage we have in this area.

Turning to the broker-dealer, I've been pleased with the progress that we have seen here, especially in terms of bringing on associates in main parts of its business. Since our last call we've added professionals in the public finance department. We’ve added professionals in the taxable fixed income department. And as I mentioned earlier, we've added professionals in our retail division.

I also mentioned on our previous call that we are in the midst of our strategic planning session for this year. The focus of that planning session is the institutional businesses in which we participate. Our attempt will be to find additional avenues of growth for each of our institutional businesses to explore in the years ahead.

Finally, let me mentioned the bank. We are a special as the liability side of the balance sheet is very strong. Today we speak about $800 million in deposits -- the cash balances from our broker-dealer to the bank. Our bankers need not worry as much as other bankers about finding deposits, their focus should be more exclusively on generating loans.

And with that in mind, I think today we have a more aggressive effort in place to hire additional bankers to take advantage of those strong deposit positions.

So it looks to me like we've got the right the people and the right structure in place, to unlock the leverage in clearing, to continue to grow our presence as a broker-dealer in Texas and we continue to get bankers to lend out those deposits.

These are exciting times at SWS Group. We have the strategies and the people to achieve our objective of growth. Thank you to our employees to go above and beyond the call of duty to help us executive these strategies. SWS Group has great employees today and I am proud to be on their team. Thank you to our customers. You are the reason we are here and we strive to earn your business everyday. And finally thank you to the shareholders for your confidence and support.

I look forward to sharing our progress with you in the upcoming quarters.

And now we'll open it up for questions. (Operator Instructions)

Question-and-Answer Session

Operator

(Operator Instructions) One moment please.

Don Hultgren

John, we have a question come in over the internet. Why don’t we go ahead and take that, while we wait for people on the line.

John Holt

Great.

Unidentified Analyst

Could you provide me more color on the nature of what's your remaining and are growing in the mortgage warehouse lending with some major national players of [XB]. Perhaps you could give us some come color on the nature of your lending controls, versus what may have been common in the industry.

Don Hultgren

Absolutely, I will turn that over to John.

John Holt

Thanks Don. On the mortgage warehouse lending side, this is a slow business, of where the mortgage company fits the loan through our warehouse line and one of the things that we do is actually underwrite that loan by looking at the applications, first couple of pages of the appraisal and actually have controls in place on that. And the other control, that's pretty significant is we predominantly do slow businesses as opposed to business which would be blocking or hedging, and so we eliminate some of those risks there. So I think we are fairly well positioned, the risk in that business, is typically not credit risk, but more broad risk, which we've gained some interest coverage for that too to practice.

Don Hultgren

Great, John. Thank you.

Operator

Are you ready for you telephone question?

John Holt

Yes, please.

Operator

Thank you [Kevin O'Keefe] from Jefferies Asset Management. Your line is open.

John Holt

Good morning Kevin.

Kevin O'Keefe - Jefferies Asset Management

Good morning guys. How are you?

John Holt

Good, thanks.

Kevin O'Keefe - Jefferies Asset Management

I was wondering if you could ball park for us or just a kind of break out by segment, the construction loans that you -- the reference in the 10-Q, they are going to be maturing within a year, and john did I hear you right? You said that you expected material deterioration or no deterioration in the single family interim segment?

John Holt

This is John. I would expect some deterioration as the mortgage qualifications, especially on the low end have become more difficult, and so for our builders that are building in this segment, they are feeling the stress and pressure of these homes, not moving as quickly as they have in the past. So, I would expect some deterioration in the interim construction loan portfolio.

Ken Hanks

And the second part of that question was--

John Holt

What's the first of that one Kevin?

Kevin O'Keefe - Jefferies Asset Management

The first part was if you could breakout the construction loans maturing within one year. It was referenced in the queue. I think the number was at $279 million, if you could break those out just within your segments, if it's all single family construction, it’s 231 maturing out of 280 within one year. So my question is basically, what's the breakout of those and have you, maybe kind of stressed at all just to see if everyone is still current and good standing, with regards to having interests carry?

Ken Hanks

Yeah, the thing you're talking on, on page 36, it’s $231 million in real estate construction. This is primarily going to be the one with our custom home builders, and so that would be the area where you would to find some weaknesses occurring at the end primarily in the lower end of that segment.

John Holt

The term with those loans, though John, is generally one year.

Ken Hanks

That’s the normal term with the loan Kevin.

Kevin O'Keefe - Jefferies Asset Management

Okay, would you -- if there's any trouble, would you just take them on balance sheet as you have the deposit room?

John Holt

Yeah, eventually what happens there is, if they continue to have cash flow difficulties, eventually, they will stop paying more and become a non-performing asset, at which time we will take our responsibility. Most of those loans are the 80% loan to value. So, I don’t see a significant loss we are a collateralized vendor on those.

Kevin O'Keefe - Jefferies Asset Management

Okay, great. And then one more question, if I may, and I will hang up and let you answer. But could you just give us some commentary and little update on the M&A environment as far as looking forward. A clearing operation and even just some of the banks down there, if they lower their expectations and if not, if you had any plans for the excess capitals, if you do some of the repurchase or payout a special dividend again may be later in the year? Thanks guys.

Don Hultgren

That’s a great question Kevin, and I really want to find a better use for the capitals and to keep paying our special dividends. And we have a lot of opportunities that we’re pursing today. That includes some clearing opportunities, as I’ve mentioned in the past there are quite a few brokerage firms that have clearing operations that are not core to their existence. Then it would be vital for us to have, and so we continue to try to convince them to see things our way.

And we’re also looking at some opportunities on the retail side, especially with the independent contractor side, where we aren’t as geographically focused as we are in the private client group side. And finally, Kevin mentioned the banks, yeah, I think it is starting to get a little bit better, as far as what expectations are, but sometimes that takes a while.

But I do think that the M&A activity and the bank side is probably beginning to see the pendulum come back more in favor of the buyers. Although it hasn’t moved far enough back, that we aren’t actually looking at anything in particular right now, but we continue to look for that. We would be very interested in acquiring a bank. So, we’re active on the clearing and on the retail side and we’re interested on the bank side.

Kevin O'Keefe - Jefferies Asset Management

Thanks, gentlemen.

Don Hultgren

Thank you.

Operator

Currently, at this time there are no further telephone questions. I would now turn it back over to Don for closing comments.

Ken Hank

We have one more question from the e-mail. Don it's - what are your plans to improve the client service experience, i.e. integration between accounts, downloads to quicken and other financial planning software?

Don Hultgren

Okay. We continue to add tools for our brokers, we have different venues, we have our private client brokers, we have our independent contractors, and of course, we have the brokers and our clearing customers. And so, we continue to get feedback from them, as I said earlier, them being our customers as to what they want for their investing party. So, as a result to that, some of the things that you’ve mentioned certainly will be on our drawing board to improve the customer experience.

Like all firms, we have to prioritize the information technology needs of our organization. So, that we don’t have a technology department it’s frankly too big for our organization. So, we continue to look at those, we do expect to have them down in the future, but it would be wrong for me at this time to attempt to put a timeframe on that.

Operator

We can have another telephone question. Are you ready?

Don Hultgren

Yes, please.

Operator

Thank you. Tripti Prasad of Sidoti. Your line is open

Don Hultgren

Hi, Tripti. How are you?

Tripti Prasad - Sidoti

Fine, good, thank you. First, I’ve a question on the ROE target for the year and are you still, I guess guiding for around the 12%, 12.5% ROE?

Don Hultgren

Well, I would just say I don't exactly guide to that number, that's the number that gets me my best payback.

Tripti Prasad - Sidoti

And, well, looking at the incentive compensation at the end of (inaudible) I’m just wondering that if this still -- and what the board has agreed upon?

Don Hultgren

Well, I would still like to see - get to that number Trip. Obviously, the ROE that we experienced in the first quarter was not 12.5%. And so, we have --- frankly, we have some of our lumpy businesses get a little lumpier in subsequent quarters. So if I say, I'd think the pipeline in corporate finance looks attractive to me. I think we are having a lot of people which I think is attractive. I would not sit here and guarantee a 12.5% return, given what we had in the first quarter but we are still attempting with it as hard as we can, to deliver that kind of number because that's in our best interest, as well as your best interest.

Tripti Prasad - Sidoti

Okay and then quickly on clearing. I think it was $0.64 per ticket last quarter and I think you've done it - I'm sorry Ken, it was second, it was $0.46 this quarter. Is that all mix?

Don Hultgren

I mean, again I have said in the past, I mean, keep in mind that the next time pricing goes up in clearing that'll be the first time. And so you never get to see a lot of upward movement in clearing prices. The trick is to minimize the downward movement. We're not seeing a lot of competitive pressure on our ticket charges right now. What we are seeing is that our high volume traders are making up of our bigger share by revenues.

Tripti Prasad - Sidoti

And a new head of clearing, I mean, any calls assigned to in terms of number of correspondents added or number of relationships developed for the year?

Don Hultgren

No we haven’t put those kinds of constraints on him yet. He's been with us now for three weeks.

Tripti Prasad - Sidoti

Yes.

Don Hultgren

We have been hard pressed to show him where to get lunch.

Tripti Prasad - Sidoti

Okay.

Don Hultgren

So, it's still little early for us to start right now what we think he could accomplish, but he has hit the ground right in and I am really happy to have him on Board.

Tripti Prasad - Sidoti

And then, I guess, the first question is about the Bank, looking at the rise in the non-performing assets, charge-offs looking. I guess, each, have really the same nominal. Can you tell me what the average loan to value ratio is to loan portfolio and then finally how confident you are that charge-off's will remain at on your current level?

Don Hultgren

Ami, I turn you over to John.

Tripti Prasad - Sidoti

Okay. Thanks.

John Holt

Trip, I think that clearly, we have been in an unusual time and that's going to return to a more normal level. On the charge-off, it doesn't feel [nice] and in the 10-K, that we had only a net $200,000 for the year on the billing ones, a bank. So those have been negative to both and are nonexistent and I anticipate as we cap the stock in the housing market, there will be some charges on there, than a more normal level for that

Tripti - Sidoti

Okay.

Don Hultgren

And the loan-to-value…

John Holt

And the loan-to-value, typically on the residential construction side is going to be an 80% loan-to-value number and that, overall, would be a good number to look at it, as we do not do a lot of unsecured lending at the bank.

Tripti Prasad - Sidoti

Okay. Thank you.

Don Hultgren

Thank you, Tripti

John Holt

Tripti, the only caveat I would put on the loan-to-value issue is obviously that the best loan-to-value calculations is not at the origination of the loan.

Tripti Prasad - Sidoti

Right.

John Holt

When there is a (inaudible) in [Fed], so once time starts running after that, it’s really dependent on the market as what the loan-to-value is?

Tripti Prasad - Sidoti

I guess, I mean to say, sequential decline in the average fund, is that due primarily to an increase in loan prepayments or lower loan origination?

John Holt

Lower loan originations in that single family, because our builders are exemplifying some of the containments that they need to, but not going out there and getting additional spec loans, which we wholly endorse.

Tripti Prasad - Sidoti

Okay. Thank you.

Don Hultgren

Thank you, Tripti.

Operator

(Operator Instructions) Sir, do you have any further e-mail questions?

Don Hultgren

No we don’t. So, I’ll just go ahead and wrap it up

Operator

Great.

Don Hultgren

Once again, thank you everyone for participating on our call this morning. As I mentioned these are exciting times here, we've got great focus on our three growth initiatives. And I look very much forward to discussing those with you in the quarters ahead. Have a great day.

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