First Midwest Bancorp, Inc. Q12008 Earnings Call Transcript

Apr.24.08 | About: First Midwest (FMBI)

First Midwest Bancorp, Inc. (NASDAQ:FMBI)

Q12008 Earnings Call

April 23, 2008 10:00 am ET

Executives

John M. O’Meara - Chairman and Chief Executive Officer

Mike Scudder – President and COO

Paul F. Clemens - Executive Vice President, Chief Financial Officer

Tom Schwartz, our President and Chief Operating Officer

Mike Kozak, Executive Vice President and Chief Credit Officer

Analysts

Andrea Jao - Lehman Brothers

Terry McEvoy - Oppenheimer & Co.

Brad Milsaps - Sandler O'Neill & Partners, L.P.

Ben Crabtree - Stifel, Nicolaus & Company, Inc.

David Konrad - Keefe, Bruyette & Woods, Inc.

Kenneth James - Robert W. Baird

Erika Penala - Merrill Lynch

Operator

Good morning, ladies and gentlemen, and welcome to the First Midwest Bancorp, Inc. 2008 First Quarter Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode.

At the request of the company, we’ll open the conference up for questions and answers after the presentation. It is now my pleasure to turn the floor over to your host, Paul Clemens. Sir, you may now begin.

Paul Clemens

Good morning, everyone, and thank you for joining us this morning. Earlier today, First Midwest announced the results for the first quarter of 2008. If you haven’t already received a copy of the press release, you may obtain it on our website or by calling our office at (630) 875-7463.

At this time, I would like to add a customary reminder that our comments today may contain forward-looking statements which are based on existing expectations and the current economic environment. These statements are not a guarantee of future performance and actual results may differ materially from those described or implied in the forward-looking statements.

Forward-looking statements are inherently subject to risks and uncertainties, included but not limited to, future operating results, market penetration, and the financial condition of the company. Please refer to our SEC filings for a full discussion of the company’s risk factors. We will not be updating any forward-looking statements to reflect facts or circumstances after this call.

Here this morning to discuss First Midwest’s first quarter results and outlook are John O’Meara, Chairman and Chief Executive Officer; Mike Scudder, President and Chief Operating Officer at First Midwest Bancorp; Tom Schwartz, our President and Chief Operating Officer at First Midwest Bank; Mike Kozak, Executive Vice President and Chief Credit Officer; and myself, Paul Clemens, Executive Vice President and Chief Financial Officer.

I’ll now turn the call over to John O’Meara.

John O’Meara

Thank you very much, Paul, and good morning everybody and thank you for your continuing interest in our company. By way of navigation, I will give some very brief remarks talking about the highlights for the quarter. I will then—on page two where it reads Balance Sheet Discussion, I’ll turn it back over to Paul for more detailed discussion of the balance sheet and income statement. We will then at the conclusion of his remarks, open it up for your questions from all of us. Thank you very much.

First quarter earnings were $0.52 per share. It represented a very strong profitability. ROA of 1.25% and ROE of 13.75%. Commercial loan growth, which was a topic of considerable discussion during last year’s earnings call, had a very promising beginning with a 9.1% increase in the first quarter.

Margins were at 3.53%. It’s the same as the same quarter last year and the same as fourth quarter ’07. Expenses remain under control showing at 2.5% increase from prior periods. Loan loss provisions were expanded during the quarter and will become the subject of further expanded comments going forward.

The quarter was really made up of two significant challenges, if you will. The first was the activity that was promulgated nationally relating to interest rates and liquidity. With the Feds raising interest rates some 200 basis points during the quarter and trying repeatedly to inject liquidity into the system as our traditional sources were under siege. I’m happy to tell you, as indicated in our margins, that our margins withstood the 200 basis points increase very well. And—I’m sorry. I said increase and I’m getting a hand signal from one of my colleagues. It’s a decrease in interest rates. I’m sorry for the mis-speak. And liquidity was also handled very well which we’ll be happy to discuss during the Q&A period.

The second challenge during the quarter was the maceration of the cycle on the residential development portfolio. We have a portfolio just by way of a up-to-the-minute update. They received information in the office this morning that new home sales in the metropolitan area were now 29% in March of this year versus the same period last year. So, the beat goes on there.

Our residential development portfolio is, first of all, concentrated in the Chicago land market. It is residential development where we have been involved for almost twenty years. It represents about $400 million or about 15% of our total construction real estate development portfolio.

A number of our clients in this area haven’t caught up in a cycle of deteriorating cash flows which is a fancy way of saying there aren’t any sales, or a significantly diminished level of sales. Making timely payments of outstanding obligations on [inaudible]. We’ve been working very aggressively with these customers to remediate these problems.

This has been manifested in higher credit charges for us. While these are aggregate charges for our whole portfolio, they’re dominated by residential 1-4 business where our provisions in the quarter—our charges in the quarter—were $6 million versus what we have been running about $1.5 to $2 million.

The loan valuation reserve itself was expanded an additional $3 million to anticipate problems in this portfolio that may arise in the future. Our other real estate portfolio went up $2.6 million and our 90-days past due portfolio went up some $12 million. We’ve remained fully engaged with these customers and in this marketplace as economic circumstances unfold. We believe that we’ve identified and valued these portfolios for current conditions but there may be further deterioration going forward. We, as the whole country, are awaiting for the development some traction in this portfolio.

If further downturn occur—we believe that we have provisions that are sufficient to anticipate the absorption of those problems but we certainly will be reporting further on that as the year goes on.

On a brighter note, leaving my comments, which brings us to good progress in commercial sales activity, which is expanding loan balances at 9.1% rate. Our asset management business, not withstanding the choppy equity markets, continues to prosper. Indeed, during the first quarter we’ve exceeded $4 billion in assets under management, making us the fifth largest manager in the state of Illinois and placing us in the top 60 in the country. I put that in there not by way of anything other than counterpoint to the credit issues because ultimately the strength of our engine is going to be our sales activity going forward and you can see that we are continuing that positive trend at the same time that we’re remediating the situation in the 1-4 family portfolio.

That concludes my introductory remarks. I’d like to turn it over to Paul.

Paul Clemens

Thank you, John. I’d like to cover a certain CNI’s from the earnings release—not all of them by any means—and allow for questions and hopefully reinforce some of the themes and context that John just discussed.

Let me start with the balance sheet. As John mentioned, we were very pleased with the growth of our commercial real estate and CNI loan portfolios in the first quarter. Balances increases $82.1 million in those lines from December 31, 2007, compared to $54 million for the entire second half of 2007. A few of some context—that’s a 9.1% annualized growth rate and shows tremendous momentum.

You might recall in 2007, particularly the first half of the year, we didn’t grow our loan portfolios partly because we didn’t believe loan pricing in terms property reflected credit risks. I want to reiterate here, we have not changed our underwriting standards but we’re now seeing widening spreads and deals that make more sense to us. And frankly, we’re successfully competing for those.

On the deposit side, our average core deposit amounts were up $47.8 million from a year ago, primarily due to growth in our savings deposits. We believe these results that John said shows that our sales force is fully engaged in the marketplace.

As I turn to our statement of operations, I believe several items [inaudible] comment. Net interest margin, as John said for the quarter, stood at 3.53%, unchanged from a year ago and from fourth quarter 2007. Now, approximately one-half of our loan portfolio is tied to [inaudible] and therefore our loan yields declined as the Federal reserves reduced a discount rate by 200 basis points during the quarter. We were able offset this decline with lower short-term wholesale borrowing rates, reduced rates paid on a portion of our retail deposits, widening loan spreads, and expanded spreads on our significant portion of our investment portfolio.

We believe our ability to manage our interest rates spread, especially over the past 3 to 6 months, splits us apart from many of our peers. John spoke to credit quality and we’ll have questions on that, I’m sure, but let me just say they spoke to negative trends in our residential development portfolio. And they do reflect themselves in our credit quality statistics.

We’re coming off two years of historically low charge off numbers. Charge offs for the quarter were 49 basis points of average loans compared to 24 basis points a year ago. Likewise, our non-performing assets plus loans past due 90 days, as a percent of total loans, was 117 basis points in the first quarter, compared to 73 basis points a year ago.

As John said, we provided for this negative trend by increasing our loan loss reserves from 1.25% of loans to 1.28% of loans. This reserve represents more than 375% of non-performing loans compared to 330% of December 31, 2007, and 355% at March 31, 2007.

As you look at our results, we believe we’re operating an efficiency ratio of 54% compared very favorably to our peers. One reason was we were able to manage our margin as described above but we have also been able to grow our fee-based businesses as a multiple of our operating expense increase. Year-over-year fee-based revenues increased 4.6% but if you exclude residential mortgage fees, which we ceased to originate in the late 2007, we’re up 8.5%. At the same time—I repeat—at the same time, our non-interest expense increased only 2.5%.

In first quarter 2008, we began to realize the benefits of the targeted staff reductions we initiated in December 2007.

Included in our results were $4.97 million of net security gains and included in these gains was a $1.35 million gain on the redemption of a portion of our ownership in Visa Inc. as part of Visa’s initial public offering.

Also, certain asset [inaudible] paralyzes debt obligations that were subject to impairment charge in fourth quarter 2007 were further reduced by $2.3 during the quarter. With the exception of one of these securities, we continue to receive all scheduled interest.

And finally, let me make just a few remarks about our capital levels and activity for the quarter. We continue to exceed all the regulatory minimum levels to consider a well-cap licensed [inaudible] by the Federal Reserves.

During first quarter 2008 we paid dividends of $0.31 per share, 5.1% increase from a year ago and a 4.5% yield on an annualized basis. At a time when many banks are per tilling dividends or suspending them entirely, we remain committed to providing return to our shareholders. This dividend represents our 101 consecutive [inaudible] dividend. And with those few comments, I’ll turn it back over to our conference host and open up for questions.

Question-and-Answer Session

Operator

Thank you, sir. The Question & Answer Session will begin at this time. (Operator Instructions).

Your first question comes from the line of Andrea Jao with Lehman Brothers. Please proceed.

Andrea Jao - Lehman Brothers

Good morning, everyone.

Management

Good morning.

Andrea Jao - Lehman Brothers

On the CDO’s been written down. I was hoping to get more color on how much was left. How much was left there in the quarter?

Mike Scudder

Sure. You recall that we had a $60 million par value that we reduced down to $10 million at December 31st. We now have about $7.7 million left Andrea.

Andrea Jao - Lehman Brothers

Okay, and is there anything else? I guess there were two batches of CDO’s, right?

Mike Scudder

Well, the other batch was quite a bit different. They’re known as CDO but these were trust-preferred CDO’s of about $85 million and they’re performing. In accordance, we’re receiving all payments and their fair market value is above 70-75% of the par value.

So, we don’t think there’s any impairment related to those.

Andrea Jao - Lehman Brothers

Okay and for both sets of assets, the way you get fair market values by a survey?

Mike Scudder

Sure, we get quotes—independent quotes.

Andrea Jao - Lehman Brothers

Okay, fair enough. Now, how should we think about loan loss provisions and net charge offs going forward?

John O’Meara

I tried to be responsive to that in my remarks, Andrea. I believe we’re properly reserved right now. I think the additional $3 million that was added to reserves in the quarter is trying to anticipate further deterioration that we may experience in the 1-4 family business. If I had a good prediction of when the 1-4 family business was going to turn, I certainly would have more precision here. I do not. I had to assume at some point in time that there will be more traction there. We’re expecting, from our forecasting standpoint, that that will be next year.

Andrea Jao - Lehman Brothers

Not in 2008?

John O’Meara

That’s correct.

Andrea Jao - Lehman Brothers

But for 2008, should loan loss provision per quarter pull in from the $9 million level but not fall to, let’s say, $2 million?

John O’Meara

I think it’s probably fair to say that closer to our traditional than to the expanded.

Andrea Jao - Lehman Brothers

Oh, okay. Thank you very much.

John O’Meara

Yes, m’am.

Operator

Your next question comes from the line of Terry McEvoy with Oppenheimer & Company. Please state your question.

Terry McEvoy - Oppenheimer & Co.

Good morning.

Management

Good morning.

Terry McEvoy - Oppenheimer & Co.

It seems like in February and early March when you were presenting a conference and talking to the investment community, you were conveying the message that the first quarter would really be a quarter where the margin would be the problem as opposed to credit. And it seems like, as I read through the release this morning, that was not the case. The margin was stable but the provisions was well above expectations, so to speak. Did something change in March where the credit problems begin to build and then you started to see some stability in the margin, or was I simply misunderstanding the message you were conveying earlier in the first quarter?

John O’Meara

Let me take the bad news. I’ll let Mike Scudder take the good news.

The loan valuation reserve discussion and etcetera is really accumulative effect. We have a portfolio of builders that sell in the same general market and as one weakens then we have to look at the next and the next. We become much more proactive there. We brought our internal resources in to look at what our exposures were and a different judgment as to what the vitality of the market was going to be. That’s what changed the assumption there.

Mike Scudder

As far as the market goes, Terry, we simply benefited from the fact that the declining rate and the elevated level of LIBOR helped us out and the combination of that in our securities portfolio actually performed better. That’s keep in mind with the impairment that Paul had alluded to. [Inaudible] we’re still getting cash flows from those assets so the yield on those assets themselves are elevated.

Terry McEvoy - Oppenheimer & Co.

And then just looking at the composition of charge offs in the first quarter—really most of the increase came from CNI and commercial real estate, not so much the residential construction component which is the part you’re cautious on today. Should we anticipate the CNI and commercial real estate charge off levels to remain the same throughout this year and then anticipate maybe an additional component coming from construction? Or do you think what John just said that the provision coming back to more normal levels is a signal that the charge offs and the non-construction portfolios will come down as well?

John O’Meara

I think the latter.

Terry McEvoy - Oppenheimer & Co.

Okay, understood. Thank you.

Operator

Your next question comes from the line of Brad Milsaps with Sandler O'Neill. Please state your question.

Brad Milsaps - Sandler O'Neill & Partners, L.P.

Hey, good morning. Just to kind of tail off Terry’s question—just curious if there was a—you mentioned a committee that determined that you needed an additional provision this quarter in terms of the construction [inaudible]. But just curious if there’s another significant event where there’d be appraisals, regulatory driven or something else that changed between the fourth and the first quarter? And just curious as to how much of your residential development you received your appraisals on, etc.?

John O’Meara

We’re in the process of getting those appraisals updated. We have some in. We’re using those to guide our anticipation on what the value is on others. But the short answer is all of that will be updated. You’d imagine that there’s quite a back log of that in the marketplace right now?

You have any other observations, Mike Kozak?

Mike Kozak

No, we are aggressively looking at all of our residential builders—those with interest reserves, those without interest reserves—and we think we’ve got a pretty good handle on it. Certainly, we’re on top of it and overall we risk grade our loans and are risk grading of our overall portfolio in spite of the up [inaudible] and the residential has remain fairly stable since last year.

Brad Milsaps - Sandler O'Neill & Partners, L.P.

Most of the increase in the 90 days past due loans this quarter be in the residential development bucket?

Mike Kozak

That would be correct.

Brad Milsaps - Sandler O'Neill & Partners, L.P.

Okay, any big change in the 30 day past due numbers from year end?

Mike Scudder

Thirty day past due numbers are up about 50 basis points so a modest increase. They’ve gone from about 2.8 to about 3.3%.

Brad Milsaps - Sandler O'Neill & Partners, L.P.

Okay. And final question—if you had to categorize your builder portfolio among different price points—I’ll let you guys decide what those are—but low end, mid-range, and the high-end. How would you sort of divvy up the $400 million of residential development?

Mike Kozak

I would suggest here that most of it is at the low to low end of the mid-range.

Brad Milsaps - Sandler O'Neill & Partners, L.P.

Okay, great. Thank you.

John O’Meara

Brad? There was a question about whether—whether it was Brad or Terry. I don’t recall which—whether any of this was regulatory driven. The answer is no. Our credit barrier was reviewed by the regulators in the Autumn and received higher marks from them. I actually can say this but we received the highest mark we can get from them. They believed that our processes are accurate and anticipatory of the problems.

Operator

Thank you, sir, and your next question comes from the line of Ben Crabtree with Stifel, Nicolaus. Please proceed.

Ben Crabtree - Stifel, Nicolaus & Company, Inc.

Yes, thank you. Good morning. Couple of small questions—the $2.3 million from market out in the impairment charge—where does that show up? Which line does that show up in the income statement?

Mike Scudder

There’s a securities gain net on the income statement of $4.968 million. So that number has narrowed to $2.3 million.

Ben Crabtree - Stifel, Nicolaus & Company, Inc.

Okay, got it. Thanks. The gain of securities sales—I guess the question would be: What kind of stuff that you sell and what was the yield on it and what’s the reinvestment rate on the funds? What are you going to do with the funds? What would be the reinvestment rates?

Mike Scudder

Ben, this is Mike. We sold about $200 million worth of securities that was predominantly mortgage-back assets. We were able to move them in the marketplace and we got a decent price out of that. I do not have the yield here with me but the reinvestment yield that we got and where we redeployed them. We deployed them predominantly back into like assets and a combination of other asset investments to about 25% of the reinvestment that will net at the higher yield than what we sold them at. We actually did pretty well with the trade.

Ben Crabtree - Stifel, Nicolaus & Company, Inc.

Interesting. Okay and I guess the big—I’m sorry.

John O’Meara

Just by way of clarity—it was the remix that allowed us to replace the yield. I imagine you’re scratching your head saying, why do you do that?

Mike Scudder

Yes, 75% went back into similar assets and 25% got redeployed into others. That generated the higher mix.

Ben Crabtree - Stifel, Nicolaus & Company, Inc.

Okay. That’ll be an awfully good trade.

Mike Scudder

We’d do that every week if we could.

Ben Crabtree - Stifel, Nicolaus & Company, Inc.

I guess one of the big questions to me is source of—a fair amount that I hear in my model is the tax rate. What’s going on there that they have such a low tax rate?

Mike Kozak

Well, we had a [inaudible] adjustment in our accrual for taxes. At 12/31 we had the impairment to be recalled and frankly overstated our tax expenses associated with that impairment and as an adjustment to that. We really expect our effective tax rate to be back—for the rest of the year—back in the low 20’s like it’s been. It’s just kind of one-time event here.

Ben Crabtree - Stifel, Nicolaus & Company, Inc.

Low 20’s rather than mid-20’s?

Mike Scudder

Well, 23, 24.

Ben Crabtree - Stifel, Nicolaus & Company, Inc.

Okay, great. Thank you.

Operator

Your next question comes from the line of David Konrad with KBW. Please state your question.

David Konrad - Keefe, Bruyette & Woods, Inc.

Good morning. Couple of questions—first on the margin being stable this quarter—just wonder with the improved corporate credit spread and maybe the yield curve, is there something going forward we can build off of and see margin expense or just the deposit price seem a little bit too challenging still right now? And then secondly, just talking about the residential builder market—a lot of investors are all really looking for the spring season to see if we can get any movement here in liquidity in that market. You talked a little bit about the March sales but I’m wondering—it doesn’t sound like you’re seeing any material change in April. So you wanted your comments on this as well.

John O’Meara

Let me give this to Tom Schwartz on the sales issue and I’ll come back and talk about the precision you brought up. Go ahead, Tom.

Tom Schwartz

Excuse me. Hi, David. No, I do not see sales picking up in the marketplace. Coming into a better sales season—normally in the March April timeframes—but frankly, I don’t think there’s going to be much of a lift.

John O’Meara

What I’m hearing is there are a lot of tire kickers. There are a lot of people walking around saying how long has this been on the market because they’re looking for discounts. And until people are pretty much convinced that nobody’s going to discount anymore, I don’t think you’re going to see the sales. I think the demand is still there. It’s just the buyers been [inaudible] by being patient.

And I’m sorry, the first part of your question was?

David Konrad - Keefe, Bruyette & Woods, Inc.

I was just looking to see maybe the outlook for March and going forward, given the better spreads. Wonder if we could build off of this or it’s just the competitive deposit pricing, kind of hoping, stables?

John O’Meara

Depends upon how further aggressive the Fed gets. We can’t go below zero on certain depository offerings. So the more they collapse rates down—low below two and a quarter—we got some room left. But if they go down to 1% then I think we start giving it back a little bit because we just don’t have room to—I’m saying retail offerings. If they do according to what we think they’ll more likely will do, which is what we’re calling for in our modeling, which is either quarter of half down pretty much right away and then leave it alone. Then our margins look pretty good and maybe trend upward a little bit to the 360, 363 area. That’s what we saw in our [inaudible] meetings earlier this week.

Mike Scudder

David, generally what happens is we’ll see an influx of tax money coming in the second or third quarter which usually provides us with help margin-wise and then [inaudible]. It’s really depending on where you think interest rates are going to fall. The rest of the year is margins.

David Konrad - Keefe, Bruyette & Woods, Inc.

Okay, great. Thank you.

Operator

And your next question comes from the line of Kenneth James with Robert W. Baird. Please state your question.

Kenneth James - Robert W. Baird

Hi, good morning.

Management

Good morning.

Kenneth James - Robert W. Baird

I had a question on the $400 million number that you quoted as exposure to residential segment—does that include lots on developed land or is that strictly homes in process?

John O’Meara

It’s everything.

Kenneth James - Robert W. Baird

It’s everything. Okay, great. And then in the income statement, the small negative and the other income line—was curious if that’s maybe and REO mark?

Mike Scudder

No, it actually is—we have adjustments for investments. We hold them in a—we mark to market for our non-qualified deferred comp plan. It shows up as a investment that we mark to market every quarter and then the change also is reflected in salaries and benefits down below. So, it kind of fluctuates from one [inaudible] other can be quite large. That’s what causes it to go down.

John O’Meara

But they’re equal and opposite. The financial impact is zero.

Kenneth James - Robert W. Baird

Okay. Well, to get the line item straight going forward, do you have that amount?

Mike Scudder

I do. Just hang on just one moment. It is a $1, 420,000 for the first quarter and it was $324,000—it was $1,420,000 negative this quarter and last year, it was $324,000 positive.

Kenneth James - Robert W. Baird

Okay, and then kind of in the terms of your non-accrual loans or your 90-days past due loans, can you talk about maybe the justifications for, especially to the extent, the residential real estate related for those loans to still be accruing interest? And then also just generally speaking, the turns there—the 90-days past due always seem pretty high but you all seem to get a lot of migration in the non-accruals. So, I’m just wondering if you could comment a little bit on the coming up of the mark up efforts or efforts to—kind of seems like you’re getting a lot of turns through those categories; efforts to move problem assets out of the bank. What are you kind of seeing there?

John O’Meara

Let me talk about the process and let Mike Kozak talk about the actual numbers.

We’re down to a semi-monthly upper-out process where we’re looking at the top 25 bad credits in the bank every two weeks and that’s myself, Tom Schwartz, Mike Kozak, his four lieutenants in the field, the head of special assets and the loan review officers. And that’s very aggressive every two week updates to remediation plans.

Our policy requires by way of what the proper categorization is, is all driven by realizable collateral values. Something that is in 90-day past due and still accruing can only be there if it’s well collateralized and in the process of collection, by policy.

Contrary-wise something is in non-accrual if there’s a question as to whether or not we have sufficient collateral value in order to get our entire principal and interest back. So, that’s the difference between the two. And we’ve followed that policy for fifteen years.

Kenneth James - Robert W. Baird

Okay, great.

Mike Kozak

Just to add to John’s comments, we’ve had a couple of basis this last quarter where, as a result to new appraisals coming in, we found that we were not in a position where we were well secured so we accordingly moved those loans to non-accruals. So, we followed that policy very, very closely. And we’ll also mention the fact that we do have a fair amount of velocity. We have a very talented workout team. We’ve got, as John mentioned, five professionals dedicated to work out loans, and we’ve got various credit people in the field. We’re aggressively working those numbers and we’ve had some success this past quarter and working through some of the problem loans and getting them off our book. And we expect that success to continue in future quarters.

Kenneth James - Robert W. Baird

Okay, thank you.

John O’Meara

And to that the frequency of a meetings—when things are very, very benign, those are once a quarter meetings. We’re not doing twice as fast.

Mike Kozak

And even our commercial lenders—our land lenders—are not separate from the process. We aggressively are working even our under 30-day past dues right now and the mantra in our bank is to get out and identify problems early and deal with them while they can still be dealt with, and that’s promulgated throughout the bank, both staff and line.

Operator

(Operator Instructions)

And your next question comes from the line of Erika Penala with Merrill Lynch. Please state your question.

Erika Penala - Merrill Lynch

Good morning.

Management

Good morning.

Erika Penala with Merrill Lynch

Just wanted to follow up—you mentioned that you’re actively managing that residential development portfolio. Did you request new appraisals for all the entire $400 million book or just for more troubled credits?

John O’Meara

Or credits that we felt were in trouble.

Erika Penala - Merrill Lynch

And I know that you haven’t got all the new appraisals in yet but for what you’ve seen so far, what kind of haircut is there implied by the new appraisals, in terms of new appraisals versus appraisals at origination?

John O’Meara

It varies. I would say generally anywhere from a third to 40% haircuts.

Erika Penala - Merrill Lynch

Is there a bid out there for non-performing residential projects? And if so, how far are the bids from the value implied from the new appraisals?

Mike Kozak

There’s no bids.

Erika Penala - Merrill Lynch

And also given your caution surrounding the housing market in your area—have you examined your CNI portfolio that is somewhat tied to how healthy the housing market is?

Mike Kozak

Absolutely.

Erika Penala - Merrill Lynch

And have you weeded out those credits or downgraded them or add more actively manage them?

John O’Meara

More actively managed them.

Erika Penala - Merrill Lynch

Okay. Thanks for your time.

John O’Meara

We have suppliers; we have sub-contractors. We have all kinds of people—title companies.

Mike Kozak

Keep in mind also that over the last couple years, we resisted the trend to be aggressive in our advance rates on home equity lines and our average advance rate on home equity lines is in the 80% or lower range. We have very few loans that are aggressive to the point of being over 90% advance when they are originated. So, we’ve had a very conservative underwriting policy which is certainly helping in this environment.

Erika Penala - Merrill Lynch

Okay. Just one more follow up question. What was your average loan to value at origination for your construction portfolio?

John O’Meara

All land is generally 65%.

Mike Kozak

Approved to 75%.

Erika Penala - Merrill Lynch

Okay. Thank you so much.

Operator

As there are no further questions, I will now turn the call back over to Mr. Clemons for closing comments.

Paul Clemens

Okay. I want to thank you again for joining us and hope you have a good rest of the day.

Operator

Ladies and gentlemen, this concludes the conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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