Colonial BancGroup, Inc. Q1 2008 Earnings Call Transcript

Colonial BancGroup, Inc. (CNB)

Q1 2008 Earnings Call

April 21, 2008  9:00 am ET

Executives

Lisa Free – Investor Relations

Robert E. Lowder - Chief Executive Officer

Sarah H. Moore - Chief Financial Officer

Patti G. Hill - Chief Operating Officer

Caryn Hughes – Chief Credit Officer

Kamal Hosein - Treasurer

Analysts

Steven Alexopoulos - J.P. Morgan

Kevin Fitzsimmons - Sandler O'Neill and Partners, L.P.

Jeff Davis - Ftn Midwest Securities Corp.

Christopher Marinac - Fig Partners

Dave Bishop - Stifel Nicolaus & Co.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Presentation

Operator

Good day, everyone, and thank you for joining us for the Colonial BancGroup first quarter 2008 earnings call. (Operator Instructions)

Now we will turn the meeting over to Lisa Free. Please go ahead, ma'am.

Lisa Free

Thank you. We appreciate you joining us this morning for Colonial BancGroup's first quarter 2008 earnings conference call. Our earnings report announcement was released this morning, and many of you should have already received copies. If not, you can access the report as well as the slide presentation for this call under the Investor Relations section of our website, colonialbank.com

With me today are Colonial BancGroup's CEO, Bobby Lowder, Chief Financial Officer Sarah Moore, Chief Operating Officer Patti Hill, Chief Credit Officer Caryn Hughes, and Kamal Hosein, our Treasurer.

First, the advisory. I will remind you that any forward-looking statements made during this presentation are subject to risks and uncertainty. Further, we have no obligation to update any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. If you are interested in factors that do cause our results to differ materially from any forward-looking statements, they are detailed on our website, in our SEC filings, and summarized in our press release from this morning.

With that, I will turn it over to Mr. Lowder.

Robert E. Lowder

Good morning. This is Bobby Lowder, CEO. We're going to jump right in and talk about credit this morning.

Our credit quality is sound and within expectations. We have no subprime, no stated income, no exotic loan or investment products. We have maintained our loan loss reserve at 1.50% of loans. Our first quarter net charge-offs was $34 million or 0.84% annualized, and our nonperforming assets did rise to $2.66 million or 1.65% of our loans.

Let's take a look at our loan portfolio. We've got them broken down on this chart for you. You will see that Residential Construction is 20% of our portfolio. Our Commercial Real Estate is 49.5%. Our Residential Real Estate, that's first mortgages and our home equity lines, is 16.5%. Our Commercial and Industrial is 7.4%. Our Mortgage Warehouse lending is 3.7%, and our Consumer and Other, 2.6% - a total of $16.1 billion in loans.

What we're going to do for you this morning is break down each one of these portfolios and take a good look at them for you. First of all, our Residential Construction portfolio at $3.2 billion. That's 20% of our portfolio. You see exposures there by state. You will see by different category. You will see the state of Florida at $1.6 billion is our largest exposure, and then you take Texas at 540, Georgia at 410, Alabama at 390 on down. And then you see it broken down by the different categories that we have.

If you look on the next slide, our Residential Construction, nonperforming assets were at $186.1 million. That's right at 70% of the total of the nonperformings.

If you will look at property type, you will see that the largest dollar amount in percentage-wise is condo construction. That is basically low-rise condo construction, four stories or less. We do have, in that $62 million of nonperforming, we do have one loan that is $21.6 million in Las Vegas. That is a project that is in a very good location in Las Vegas. The project is five phases, 21 buildings totaling 113 units. Other banks are involved in different phases. We have financed Phase 3 and 5, or 37 units. Costs increased; the developer ran out of cash. Contracts are in place on 95% of the units; they're good solid contracts. And the developer has filed Chapter 11 bankruptcy. All the banks are working together. We need to finish the project. We feel like these contracts will hold, and we have every expectation we will get all of our money back on that project. But that is the reason the condo jumped up there in nonperforming.

You will see that by location, Florida is the largest percentage, with Nevada with that one loan in second.

Next slide is our Residential Construction net charge-offs. This is 78% of the total of the net charge-offs at $26.2 million. You will see, again, condo construction being the largest dollar amount. Primarily that is in lowrise construction in Florida and Georgia.

We're being very aggressive in our nonperformings, and we've been very aggressive in our net charge-offs. We really want this situation to be a 2008 workout in all of our loans, and so we have decided that we're going to be aggressive in renegotiating any renewals. And if we can't do that, then we'll take other actions. So you will see those two - nonperformings and net charge-offs - primarily in the category of Residential Construction.

Now the next slide is our commercial real estate. This is 50% of our portfolio. It's $7.9 billion by property type. You can see we're very diverse by these property types. You will see that retail is the largest percentage.

And I know a lot of folks are concerned that commercial real estate is going to be the next problem. We are really not seeing any problems in our commercial real estate portfolio. Over $5 billion of that $7.9 is very seasoned commercial real estate and is performing very, very well with very low delinquencies ratios.

In the retail portfolio [advance the slide] our two largest properties, one is a shopping center in South Florida that's anchored by the - the anchor [inaudible] is Sedano Grocery Store, a large Hispanic chain in there. The property is 100% leased, a loantovalue ratio of 70%, and we have a deposit relationship in excess of $13 million on that. The center is performing very well. That's an $18 million loan. The second largest is in the West Coast of Florida, a strip center that is 100% leased and a loan-tovalue of 68%.

Office is the second-largest category there. Office is still a strength in Florida. All of Florida is still under the national averages in vacancies and, in fact, Miami, you will see later, where we have our largest office exposure, is seventh best in the United States.

You will see from a location standpoint we are very diverse - 57% is in Florida but that's, you know, more of the company is there, so you would expect that. The average size loan in this 50% of our portfolio is $700,000, so you can see it's a very diverse and a very low average sized loan number.

Our non-performings in commercial real estate total $56 million or 21% of the total nonperformings, and you will see that the largest category in that is commercial land. There we had a situation where we had a $20 million loan, beachfront property in Panama City. This loan really should not have gone into nonperforming, but we are asking that the loan be brought completely current or the property be sold.

A little history on the loan. The property was originally purchased by the borrower in 2005 for $40 million, so there was $12 million in cash equity upfront. So the loan is for $28 million. We have $20 million; $8 million is participated with another bank. A piece of property down the road just a couple of weeks ago sold for $31 million. It was zoned for 600 units. Our property is zoned for 900 units. I really believe this property will be back to either performing or off our books by the end of this quarter. If you take that out, then that $20 million is 36% of that total of $56 million.

Again, location-wise you can see the breakdown on our nonperformings by location.

Commercial real estate net charge-offs are very low - $2.5 million, or 7.4% of our total net charge-offs - and then you have the locations there on the chart.

Other loan types are 30% of the portfolio at $4.8 billion. You can see that our Residential Real Estate is by far the largest percentage. There again, we don't have any subprime. We don't have any pickapay. These are standard first mortgage loans. Home equity is about $650 million of that total, and our home equity lines continue to perform very well.

You will see mortgage warehousing and then C&I and consumer make up the other categories. Nonperformings and our net charge-offs you will see in those categories were Residential Real Estate and nonperformings at $20 million, and you'll see the net charge-offs is very low numbers.

So if you add all that up, you see our non-performing asset categories did increase to $266 million, and you can see the breakdown there. You can see the Residential Construction portfolio makes most of that; 90% of our increase in nonperformings came from the Residential property types, 32% of the increase this quarter over the previous quarter came from two credits totaling $41 million - the Las Vegas project at $21 million and the Florida Panhandle Panama City project at $20 million. So 32% of that increase came from two property types, and you can see the location as it's broken down there.

Our net charge-offs, again, you can see $33 million, and you can see the breakdown there with condo and Residential Construction being the largest types and you can see the locations.

Now I would bring your attention to one other page. The last page in the earnings call brochure is Page 28. The title of that is, "Diversified Commercial Real Estate Construction Loan Portfolio." This is a very interesting chart, and I would invite you to pay attention to this. This is taking the 20% of the total we have in Residential Construction and the 50% in commercial real estate, and on the left-hand side of the page it's breaking it down by property type. And you can see that comes all the way down. It starts at Retail and goes all the way down to all other types.

And then across the page it breaks it down by area, and what we've done with Florida, we've broken that down into five different areas because I do not believe you can paint Florida with one stroke for different property types because one may be performing well and we've broken that down in Central Florida, West Coast, South Florida, Panhandle, and Northern Florida. Then we've got Alabama, and Alabama is Huntsville, Birmingham, Montgomery and Mobile. You've got Georgia, that's primarily Atlanta and Columbus, Georgia. You've got Texas, that's Dallas, Austin and San Antonia. And then you've got Nevada, that's Las Vegas and Reno.

And if you'll look at this chart you will see that we are very diverse in what our exposure is by type, by property type, and also by location. For instance, look at Retail. You see it says Retail Other Than Gas Stations, and you'll see that percentage is 11.60%. If you'll come across the page you will see that our largest exposure in Retail is in South Florida at 2.36%. Retail in South Florida, primarily Miami, is performing very, very well and doing very well. And you'll come across our second-largest exposure is in Texas at 2.05%. Texas is performing well in all property types.

If you come down to Residential Development, a lot of talk about what our exposure is in Residential Development  it's 13.8%. You can see the largest percentage exposure we have at 3.45% is in Texas, which is very good.

You'll look at Commercial - if you come down and look at Residential Homes Under Construction you will see that our three largest areas where residential homes are under construction is Central Florida, that's Orlando, that's Georgia, which is primarily Atlanta, and you will see Texas, which is Dallas and Austin and San Antonio. Now in my opinion, the two fastest areas that will come back in residential home construction as far as recovery will be Orlando and Atlanta because they will come back because there is good population growth, there's good job growth there, and those economies are still generally pretty well.

Land Only, you will see our exposure there. The three top are Central Florida, which is Orlando, West Coast Florida, which is primarily Tampa - we've got very little exposure from Sarasota down to Naples - and Texas.

And then you will see Office, you will see Office Non-Medical, our largest exposure there is in South Florida. And gain, Miami is the seventh-best office market in the United States from a vacancy standpoint.

So I would encourage you to look at this chart. It shows we are very diverse by property type, and we are very diverse percentage-wise by location.

With that, I'll turn the program now over to Sarah Moore.

Sarah H. Moore

Thank you, Mr. Lowder. Good morning, everyone.

We're pleased to report a significant increase in earnings over the fourth quarter of 2007. The primary items that impacted the first quarter's results were provision expense, net interest margin compression, and an increase in noninterest expense.

Colonial's provision of $35.5 million was down 62% from the fourth quarter. The provision more than covered net charge-offs, thereby increasing the company's loan loss reserve to $241 million.

Net interest income decreased by 7% due to net interest margin compression of 49 basis points which I will discuss in a later slide.

The company has a strong average deposit growth in the quarter. We also had good fee income growth over the first quarter of the prior year of 11%.

Expenses increased linked quarter due to seasonal increases in payroll taxes and benefits, one full quarter of Citrus & Chemical expenses versus one month in the fourth quarter, an increase in servicing expenses related to an increase in average mortgage warehouse assets, and an increase in the cost of FDIC insurance.

Colonial is in a solid capital position at March 31. Colonial issued $250 million of sub debt in March. The coupon on that debt was 8.875%, which Colonial swapped to three-month LIBOR plus 331, which totaled 6.4% at March 31. The debt increased Tier 2 capital. I will talk more about capital in a moment.

A graph of EPS is on Page 17, followed by a graph on net interest income on Page 18. We provided you with a reconciliation of net interest income and margin on Page 19.

During the first quarter, we not only saw increased deposit competition, which kept rates disproportionately high to fed funds and the LIBOR swap curve, we also saw customers more actively managing their deposit dollars by shifting their deposits to higher-rate accounts from low and no-cost deposits. This took about 13 basis points out of margin in the quarter.

Mortgage warehouse assets increased $1.8 billion on average over the fourth quarter, which was net interest income accretive but was dilutive to margin by 12 basis points.

The largest item is our asset sensitive balance sheet. The rapid 200 basis point rate reduction in the first quarter repriced approximately half of the company's loan portfolio, which the company was not able to offset by passing through to deposit customers. However, we are beginning to see the competition lower rates. Many of our loans are currently at their floors and deposits will be maturing and repricing lower in the coming months, which we expect will stabilize the margin.

On Page 20 is a slide of average deposits. We are pleased that deposits generated by our franchise continue to provide the company with a valuable, stable and growing funding source. Colonial's average branch size is now over $50 million. Excluding acquisitions, average deposits grew 7% over the first quarter of the prior year and 9% annualized over the fourth quarter of 2007.

On Page 21 is an illustration of fee income and expenses to average assets. Core noninterest expense to average assets was 2.28% of average assets, which is well controlled and is in line with the full year 2007.

Finally, on Page 22 we've outlined several key points regarding capital and liquidity. First, we expect to remain well capitalized independent of a common stock offering. We believe that the offering is a prudent measure to proactively manage our balance sheet. The planned offering is expected to fortify our balance sheet. We lowered the quarterly dividend, which preserves capital of approximately $60 million annually or 30 basis points of Tier 1 capital.

We are being very conservative in originating new loans, which we expect will have the impact of decreasing our loan balanced throughout the rest of 2008. Our mortgage warehouse assets are also short-term, and the company is actively managing those assets down. Those declines in net balances will further strengthen our capital ratios.

I've presented a list of key ratios at March 31, 2008 for you on Page 22 of the slides. The tangible common equity ratio excluding unrealized losses on available for sale was 4.59% at 3/31. With a planned offering of $250 million, that ratio increases 95 basis points to 5.54%.

The Tier 1 capital ratio was well over 8% at 3/31/08. With the $250 million planned offering, that ratio on a pro forma basis at 3/31 is 9.30%.

You can also see the total risk-based capital ratio was 12.01% at March 31, and that ratio improves to 13.26%.

It's important to keep in mind that we are well in excess of the regulatory minimums to be well capitalized at March 31. Our expectation, even without the planned offering, is to be well above the well-capitalized minimums throughout 2008. But again, we believe that it's prudent to raise capital considering the economic uncertainty and the challenging operating environment that we are currently in.

Colonial has a very strong liquidity position with ample sources of liquidity with unused wholesale funding sources in excess of $5 billion at March 31.

Our strong average organic deposit growth from the retail banking franchise, again, that's an extremely valuable source of liquidity. Our deposits fund 70% of our assets, and we've demonstrated in the first quarter our ability to grow our retail franchise.

We have a strong high-quality investment portfolio, no subprime or CDO exposure in the portfolio, and our unrealized losses, the accounting adjustment that we took at 3/31 through capital was simply due to the illiquid capital market. It's temporary in nature, and we expect it to turn around.

And Mr. Lowder, that concludes my comments.

Robert E. Lowder

So our outlook for 2008, we do expect the remainder of this year to be challenging in the operating environment for all banks, including Colonial. We believe that we have a realistic view of the operating environment. Our liquidity is strong. We have a solid capital position. A common stock offering will ensure that we significant financial flexibility to weather the tough times ahead. We have isolated the loan credits to the Residential Construction sector of our loan portfolio, and we are aggressively working those. We have a special assets team in place that's working that and doing a very well job there. And we have no off-balance sheet items.

The only other thing I would add is do not forget the great franchise we have built and we have. We have 343 branches across our footprint. If you look at any chart of population growth through 2012, you will see that Colonial is several percentage points above anybody else in being in the right places. And over time, that will pay dividends for Colonial again.

We have a great Florida franchise. We have over 200 branches in Florida, we're the fifth-largest commercial bank in Florida, and Florida will - there will be a time when Florida comes back again. Florida is suffering some now, but it will return. And we have a great franchise, and we are in the right places.

With that, we'll open it up for any questions you may have.

Questions-and-Answer Session

Operator

Thank you. (Operator Instructions)

Lisa Free

In order that we respond to as many individuals as possible, we ask that you limit your question to a single question with one follow up.

Operator

And we'll take our first question from Steven Alexopoulos with J.P. Morgan.

Steven Alexopoulos - J.P. Morgan

Hi. Good morning, everyone.

Robert E. Lowder

Good morning.

Steven Alexopoulos - J.P. Morgan

A couple of questions on the capital raise in terms of could you give your thoughts on private equity verse public equity, maybe some comments on pricing expectations?

Sarah H. Moore

Good morning, Steven. We determined that a public offering was in the best interest of our shareholders. We've had a tremendous amount of reverse inquiry through the years that if we ever did a follow-on common stock offering, and we thought that was the best execution for Colonial Bank, to do it in the public manner.

Your next question, Steven -

Steven Alexopoulos - J.P. Morgan

Just comments on thoughts on pricing, and is there a minimum price that you won't do an over [inaudible]?

Sarah H. Moore

No. We're just going to see how it goes during the day based on the interest that our underwriters give us feedback on.

Steven Alexopoulos - J.P. Morgan

And timing of this?

Sarah H. Moore

We launched this morning. So we won't know until the deal is done, but we will put out a press release when it is priced.

Steven Alexopoulos - J.P. Morgan

Maybe I could hopefully ask one more follow on? In terms of the dividend, why not just suspend the dividend here? I mean, the payout ratio looks to be pretty high even post cut.

Sarah H. Moore

Well, it's around, I guess, 4%, and that's in line with our peers. And we feel very comfortable, number one, that it was a very hard decision to reduce our common dividend. It was not taken lightly. We know that it was painful for our income-oriented and retail shareholders, however we concluded that it was the right decision for all our shareholders given our outlook. And we believe that we did what was prudent, and it's not necessary to do any more.

Steven Alexopoulos - J.P. Morgan

Okay. Thanks.

Operator

And our next question comes from Kevin Fitzsimmons with Sandler O'Neill.

Kevin Fitzsimmons - Sandler O'Neill and Partners, L.P.

Good morning, everyone.

Robert E. Lowder

Good morning.

Kevin Fitzsimmons - Sandler O'Neill and Partners, L.P.

Just one thing on the problem loan levels. You've given non-performing assets. Is it possible to get a glimpse of what your watch list is, what that is doing, or more broadly speaking what classified loans are today versus they were a quarter ago?

Robert E. Lowder

Well, they're up. There's no doubt about that, Kevin. But again, we're being very aggressive in what we're doing. And we do expect net charge-offs to rise above the first quarter level in the second quarter of this year. But we expect the net charge-offs to decline in the last two quarters of the year, resulting in a net charge-off ratio for the full year of 2008 to approximate the annualized rate for the first quarter.

But we view, you know, all of our problems have pretty well contained in the Residential portfolio. It is a very short-term portfolio. Most of those loans have either come due or shortly were coming due, and we have been aggressively working all those. We've done a review of all loans of any size and I'd say any relationship above $2 million in the rating categories of 5, 6, and 7. We've been through every one of those loans, and so we have been aggressively managing those loans to either get them into good shape from a performing standpoint by additional guarantor support or, if not, you know, trying to work them out of the portfolio.

So we've been aggressively doing that. We want this to be a 2008 problem not a 2008 and 2009 problem, and that's why we're being very aggressive in what we're doing.

Kevin Fitzsimmons - Sandler O'Neill and Partners, L.P.

Just a quick follow up. Given the hard decision you all spoke of in cutting the dividend and given the fact that it was just really 90 days ago that the Board voted to increase the dividend, can you give us a little glimpse of what really changed? We knew the environment was very difficult 90 days ago. Is it the fact that you seem to be talking about this as a 2008 kind of event, identifying the problems, where I think a quarter or two ago it was more about being aggressive in the first half and stabilizing in the second half.

So is it a matter of duration or severity or both that led to that decision?

Robert E. Lowder

No. The dividend decision was made primarily because it would be inconsistent with our message of capital preservation for us to be raising $250 million in common equity while maintaining our current dividend payment. I mean, that was really the decision there. You know, it's inconsistent for us to go out and be trying to raise $250 million and then continue to be paying the dividend we were. It's a tough decision. It affects all of us, but we had to do it.

Kevin Fitzsimmons - Sandler O'Neill and Partners, L.P.

Okay, great. Thank you.

Robert E. Lowder

Thank you.

Operator

Our next question comes from Jeff Davis with Ftn Midwest Securities.

Jeff Davis - Ftn Midwest Securities Corp.

Good morning. A follow up to Kevin's question. Then to the extent net charge-offs are expected to ease somewhat in the second half from whatever they may be in the second quarter, would it be fair to say or would I be putting words in your mouth, Mr. Lowder, that the Residential C&D-related non-performing assets should peak in 3Q or 4Q, then?

Robert E. Lowder

I think, yes, I think that is correct.

I think that, you know, what happens is when you're working on loans, you can never control timing. Just like this loan that we talked about that went into non-performing in Panama City. When you start negotiating with folks, if lawyers get involved, it takes forever to work things out.

For example, we've got a $10 million credit in Texas that is past due more than 90 days and it's in our stillperforming category there because it is well secured. I mean, we had property, we had an investment account, and we had a yacht. We got control of the yacht and sold it. A federal judge has sat on the proceeds for months. We had the investment account. We went to court. We got it. It's sitting in some other judge's court. Finally, the property has sold and the closing is this week, and we're going to get all of our money back. But the story is that it takes longer than you would like to work things out, especially when lawyers and judges get involved.

And so timing can slip into different quarters, and that's just where we are in this cycle as we work problems out.

Jeff Davis - Ftn Midwest Securities Corp.

Okay. And Lisa, if I could ask a follow up, on the investment portfolio, it may be in the release and I'm just missing it but the reference production in the securities portfolio, how much was that? And Patti, if you could give us a little  or Sarah - if you could give us a little color about sort of the who, what, where and how of the loss?

Kamal Hosein

Hey, it's Kamal.

Jeff Davis - Ftn Midwest Securities Corp.

Kamal? I'm sorry.

Kamal Hosein

The margin [market] on the securities portfolio was down a pretty good bit quarter-over-quarter. Most of that was in our nonagency CMO portfolio. We've discussed it, you know, from time to time. We feel very comfortable with it.

The amount of illiquidity in the market, you know, as been discussed by some of the largest firms in the country during the last couple weeks of March, really made pricing very difficult.

All these securities are triple A, are still triple A, and it's just a matter of the overall liquidity positions returning.

We feel very comfortable with the credit underlying and obviously with the deposit franchise and liquidity that we have, we'll have no problem holding those until they return back. The credit losses won't be there, and this is just a temporary phenomenon because of the overall liquidity problems in the overall market.

Jeff Davis - Ftn Midwest Securities Corp.

Okay. The non-agency CMO portfolio, Kamal, how much was that, and then how much was the overall change in the unrealized value between year end and 1Q?

Sarah H. Moore

The overall change was about a $156 million decline.

Kamal Hosein

And the portfolio size is about $1.5 billion neighborhood.

Jeff Davis - Ftn Midwest Securities Corp.

Of the nonagency CMO?

Kamal Hosein

Yeah, the nonagency CMOs are in the neighborhood of $1.5 billion.

Jeff Davis - Ftn Midwest Securities Corp.

And the 156 was for the total portfolio?

Sarah H. Moore

[166] decline.

Jeff Davis - Ftn Midwest Securities Corp.

Okay. Thank you very much.

Operator

And our next question comes from Christopher Marinac with Fig Partners.

Christopher Marinac - Fig Partners

Thanks. Good morning. I'm curious about loan growth for the next few quarters. Do you still expect to grow the balance sheet or would that tend to stay flat?

Robert E. Lowder

It's probably going to decrease. The only meaningful loan growth we're having is through the Texas franchise, but as we work these Residential loans out, it's going to be pay downs, I think. The Residential portfolio decreased about $140 million in the first quarter, and I think you will continue to see that. If we do decrease the mortgage warehouse relationship some, so that'll decrease. So the loans will go down.

Christopher Marinac - Fig Partners

Very good. And then on the loss figures that you mentioned a few minutes ago, will we see sort of high volatility between the second quarter and third quarter and fourth or will it be a little more smoother?

Sarah H. Moore

Are you speaking of the net charge-offs?

Christopher Marinac - Fig Partners

Correct.

Sarah H. Moore

That Mr. Lowder spoke about earlier?

Christopher Marinac - Fig Partners

Correct.

Robert E. Lowder

Well, as I said, I think what you will see is very much - I think you will see them rise in the second quarter, and then I think third and fourth quarter they're going to return to the levels of the first quarter this year annualized.

Christopher Marinac - Fig Partners

Very good. Thank you very much.

Operator

And our next question comes from Dave Bishop with Stifel Nicolaus.

Dave Bishop - Stifel Nicolaus & Co.

Hey, good morning, Bobby.

Robert E. Lowder

Good morning.

Dave Bishop - Stifel Nicolaus & Co.

Hey, a question for you. I think there's some commentary in the release regarding the retention of NPAs there in light of the market conditions. Maybe update us on what you're seeing in terms of pricing for distressed assets there in the different markets?

Robert E. Lowder

There is a lot of liquidity out there. I mean, there's money everywhere. Of course, they don't want to pay any reasonable amounts. They want to pay 40 or 50 cents on the dollar.

But just remember, guys, these people that put together all these billions of dollars of funds and want to come down here and buy this property for 50 cents on the dollar, they're not buying it because they think 12 months or 18 months or 24 months from now it's still going to be worth 50 cents on the dollar. They're buying it because it's going to be worth $1.50.

And so we just need to be careful ourselves that we don't rush out here and, you know, as we discussed in this $20 million loan we've got on Panama City - and then we've got another $8 million participate to another bank, so that's a $28 million relationship - that property was bought in 2005 and $40 million was paid for it. So the borrower put $12 million cash equity into it, and so the loan was for $28 million. You know, those values have still, you know, we got an appraisal that was made at the end of 2007 showing the appraised value of the property at $37 million, and that was a good appraisal. And like we said, a similar piece right down the road from that with less density permission was sold at public auction for $31 million.

So we think that the properties that we have have good values. They have not decreased, you know, the properties that are decreasing the greatest are the Grade C, D and F properties. We think our properties are better than that.

So we just need to be careful that we don't panic and give away properties this year that 12 months or 18 months from now are going to be worth a whole lot more than anybody paid.

But to answer your question, there is a lot of liquidity out there. There's lots of funds looking to buy these assets.

Dave Bishop - Stifel Nicolaus & Co.

Okay. And one follow up, maybe, for Sarah. The other expense category seemed to have, the pure other expense category, seemed to have an unusual jump this quarter.

Sarah H. Moore

Right.

Dave Bishop - Stifel Nicolaus & Co.

Any sort of color you can give there?

Sarah H. Moore

Well, our mortgage warehouse assets increased $1.8 billion or 54% growth on average over the fourth quarter. And we sub-service those assets so if those assets increase, the expenses related to the servicing of those assets increase. So that was a large piece of it.

The other is a lot of small items that were related to the Citrus & Chemical, nothing significant that I could really break out in more detail than I did.

Dave Bishop - Stifel Nicolaus & Co.

Thank you.

Operator

Our next question comes from Jefferson Harralson with KBW.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Hi. Thanks. I just wanted to ask you guys about how the new dividend was set. Were you guys targeting a payout ratio for the next few quarters or how did you come up with $0.095?

Sarah H. Moore

Jefferson, we looked at the preservation of capital, we looked at the dividend yield compared to our peers where we're trading. It puts our yield in line with everyone, and it will save $60 million of capital annually.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Okay. And similarly, on the capital raise, how was the 250 - I guess, why was the 250 chosen as a number?

Sarah H. Moore

First of all I think it's important to note that we believe we'll maintain well in excess of any regulatory minimums throughout 2008 independent of the capital raise. That was what, based on our market cap and just to provide a cushion for uncertainties that are out there, we thought that 250 would certainly be adequate.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

And lastly, how did you balance your very high regulatory ratio against your lower tangible equity ratio? Did your tangible equity ratio being low play a part in raising capital?

Sarah H. Moore

Yes, it did. And that was the main ratio, Jefferson, that we looked at. With the mark-to-market on the securities portfolio, it's really impossible to predict when that mark will return. We wanted to, as we stated publicly before, our Board targets a tangible common equity ratio around 5%. In the context of an acquisition, we'll certainly let it go below that. We had the acquisition in December. We knew our tangible common ratio would be below 5% in the context of the acquisition but with the March marks on the investment securities - and we're not sure when that will return although we know it will - we thought that 250 would put us back into Board-targeted ratio.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Okay. Thanks a lot, guys.

Operator

And our next question comes from Jeff Davis with Ftn Midwest Securities.

Jeff Davis - Ftn Midwest Securities Corp.

I have a follow-up question. Kamal, I guess this is for you. In terms of the mortgage warehouse, any issues in selling the flow into the secondary market, or is there a piece that is, if you will, stranded due to liquidity and, if so, how big is that block of assets?

Kamal Hosein

Not really. I mean, we're moving things through pretty well. I mean, the size did move up because we brought the assets back on balance sheet. You know, when you have the size position that we do, there's always going to be little stragglers here and there that documents have to be changed or things like that, but nothing of significance to discuss.

Jeff Davis - Ftn Midwest Securities Corp.

And within the non-performing assets, any related to the mortgage warehouse or any losses realized off the warehouse?

Kamal Hosein

No.

Jeff Davis - Ftn Midwest Securities Corp.

Okay. Thank you.

Operator

And that concludes today's question-and-answer session. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Robert E. Lowder

We appreciate your attendance today, and we look forward to talking to you again soon. Thank you.

Operator

And that concludes today's teleconference. Thank you for your participation. You may now disconnect.

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