Nexity Financial Corp. Q2 2008 Earnings Call Transcript

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About: Nexity Financial Corp (NXTY)
by: SA Transcripts

Nexity Financial Corp. (NXTY) Q2 2008 Earnings Call August 1, 2008 10:00 AM ET

Executives

Greg Lee - CEO

Mark Moran - CFO

Ken Vassey - Chief Lending Officer

Analysts

Alex Paul - Williams Financial Advisors

Michael Schomer - Raymond James

Jason Werner - Howe Barnes

Operator

Hello, and welcome to the Nexity Financial Corporations' second quarter 2008 Earnings Call. (Operator instructions).

Now, I'd like to turn the conference over to Chairman and CEO, Greg Lee. Mr. Lee?

Greg Lee

Thank you, Ryan. Good morning. I'd like to welcome everyone to our second quarter 2008 webcast conference call.

For the second quarter 2008, we reported a net loss of $2.75 million or $0.35 per diluted share compared with net income of $1.14 million or $0.13 per diluted share for the same period in 2007. This second quarter figure for 2008 was also down from $679,000 or $0.08 per diluted share in the first quarter of 2008.

These disappointing results are significantly reflective of the tremendous stresses been felt in our business lines and the geographic markets which we serve.

Our primary objective for the first half of this year has been too aggressively and thoroughly identify and manage our problem loans, and we have made material progress in that process. At June 30, we had $50.7 million in nonaccrual loans, of this total, we have two loans which comprise $9.8 million on which we do not anticipate any loss, bringing to non-accrual loans on which we do anticipate potentially some loss to $40.9 million, and we consider ourselves well reserved for this group of loans.

One bright indicator on the credit side is, at the end of the second quarter the significant decline in past due loans which fell from $13.1 million at March 31, to $2.1 million at June 30th. Charge-offs during the second quarter totaled $2.9 million and consisted substantially really of one credit totaling $2.8 million. This particular loan was to an investor who owns stock in an Atlanta area community bank which is under extreme duress.

With respect to our loan loss reserve, we provisioned, $5.8 million, during the second quarter and net of charge-offs for the quarter. This brought our loan loss reserve to 1.63% of loans as of June 30. We will continue to be aggressive in addressing our problem credits and we have established a special asset initiative spearheaded by a seasoned industry veteran. We are developing and implementing unique and individual strategies for each credit in our effort to maximize our recoveries.

Moving on to capital, we raised $10 million in an offering, which was primarily to our customer base of community banks. This offering was completed in June. As of June 30, our total risk based capital ratio equaled 10.53%, and our leverage ratio was equal to 8.4%. We conducted this offering ourselves and we were able to obtain very attractive terms and structure for our share holders.

With respect to loan growth the current economic environment is producing an increased demand from our community bank customers for assistance with their liquidity and capital needs. What this really translates into for us is an opportunity for us to grow our loan portfolio and higher quality credits, such as owner occupied and income producing properties, as well as loans made directly to banks and bank holding companies.

During the quarter, we actually experienced significant growth in our loan portfolio, due largely to the pressures I've just described as it relates to our community bank customers. We've actually got Ken Vassey, our Senior Lender here with us this morning, and I am going to get Ken to provide some additional detail on the nature of the loans which we added during the second quarter.

Ken do you want to talk about that for a second.

Ken Vassey

Yes. Thank you, Greg. As we talked about it in the last call, several of our customers are under liquidity and capital pressures, and we've been able to purchase loans from this customer banks really over the last 60 days. We have been able to get a higher yield that we have in the past plus we've been able to get owner occupied commercial real estate loans. In addition to those, we've had several of our customer banks that have come to us for holding company loans that we've been able to assist them. Mark?

Greg Lee

Thanks Ken. On the liquidity position, our liquidity position improved during the second quarter with total deposits expanding by a $108 million. During the quarter, we also expanded our available credit lines from various lending sources. Our investment division continues to produce stellar numbers and had a very strong second quarter with total revenues of $2.3 million, bringing their year-to-date revenues to $5.3 million.

Our investment groups in both Birmingham and Milwaukee are making tremendous strides in adding customers across the board. Our monitoring and operational divisions have also been expanding and enhancing their customer base in the product offerings they have.

At these points I would like to turn the program over Jack Moran, our CFO, and ask him to provide greater detail on our financials.

Jack Moran

Thank you, Greg. This presentation in our financial statements include the non-GAAP measurements, operating income, a reconciliation of operating income to net income is available on our website www.nexitybank.com at the "Investor Relations" tab. Click on "Press Releases" for this earnings release.

We may make statements today that may be forward looking statements and they are subject to risk and uncertainties. Please refer to our press release for further notation of these risk and uncertainties.

We had a net loss in the second quarter of $2.75 million, or $0.35 per diluted share, compared with net income of $1.14 million or $0.13 per diluted share for the same period in 2007, and $679,470 $470 or $0.08 per diluted share for the first quarter of 2008.

The decrease in earnings was primarily related to our higher provision for loan losses related to an increased level of nonperforming loans and net charge-offs. Net interest income was up from the first quarter and noninterest income continues to be strong.

Return on average assets and return on average equity were negative 1.08% and a negative 15.92%, respectively, for the second quarter of 2008, compared with 0.29% and 3.95% during the first quarter of 2008, and 0.51% and 6.91% for the second quarter of 2007.

During the second quarter of 2008, we issued $10.0 million in trust preferred securities to strengthen our capital position. The total risk-based capital, tier 1 risk-based capital, and leverage ratios at June 30, 2008 were 10.53%, 9.23%, and 8.40%, respectively.. Each of these ratios is above the well capitalized regulatory minimums.

For the six months, ended June 30, 2008, the net loss was $2.15 million or $0.27 per diluted share compared to net income of $2.71 million or $0.31 per diluted share during the same period in 2007.

Return on average assets and return on average equity were a negative 0.43% and a negative 6.01%, respectively, for the six months ended June 30, 2008, compared with 0.63% and 8.25% for the same period in 2007.

Loan growth was outstanding during the quarter, as we grew $74.1 million or 45.2% annualized from March 31, 2008 and a $100 million or 15.9% from June 30, 2007.

Total assets grew to $1.1 billion at June 30, 2008, up $173.8 million or 18.8% from June 30, 2007. Total deposits were $668.6 million at June 30, 2008, down $24.5 million or 3.35% from June 30, 2007, but were up a $107.5 million or 77.1% annualized from March 31, 2008.

Net interest income was up 5.6%, annualized from the first quarter of 2008, and down 16.5% from the same period in 2007. The net interest margin was lower in 2008 primarily due to the declining interest rate environment, write-down of accrued interest on loans placed on nonaccrual status, and the level of loans that are on nonaccrual status. The write-down of accrued interest cost the net interest margin approximately 9 basis points during the second quarter versus 5 basis points during the first quarter.

The cost to the net interest margin of carrying nonaccrual loans was approximately 18 basis points in the second quarter versus 9 basis points in the first quarter. While we have continued to re-price our maturing CDs lower, competitive pressures has kept these costs elevated compared to other money market rates like the fed funds rate.

Excluding the effects of nonperforming loans on the net interest margin, I believe we will see continued improvement, but due to competitive pressures on the cost of funding sources the net interest margin will continue to be well below our goal of 2.90%.

Average interest-earning assets for the second quarter of 2008 increased 14.1% from last year, and 36.5% annualized from the first quarter of 2008. Average earning assets were higher because of strong growth in loans outstanding. Average loans were up $74.1 million or 12.3% and $41.9 million or 26.5% annualized from the first quarter of 2008.

The provision for loan losses during the second quarter of 2008 was $5,835,000 versus $900,000 for the first quarter of 2008 and $440,000 for the same period in 2007. The provision for loan losses was higher primarily because of net charge-offs and an increase in nonperforming loans. Net charge-offs for the second quarter of 2008 were $2,864,244 or 1.71% of average loans on annualized basis versus a net recovery of $6,742 for the first quarter of 2008 and net charge-offs of $23,231 or 0.02% for the same period in 2007.

Charge-offs were escalated in the second quarter primarily due to a $2.81 million charge-off on a loan to an individual investor secured by stock in a bank holding company located in Atlanta, Georgia

Noninterest income for the second quarter of 2008 was $2,816,041, up $2.2 million or 378.4% from the $588,697 reported for the same period in 2007 and down $608,073 or 17.8% from the $3,424,114 reported for the first quarter of 2008. Noninterest income was up significantly from a year ago primarily because of an increase in income from the brokerage and investment services division.

Income from this division reached an all-time high of $3.0 million during the first quarter of 2008 and was $2.3 million in the second quarter of 2008.

We continue to have very good growth of noninterest income in each of our business lines compared with last year. At June 30 2008 we have 398 correspondent bank customers operating in 23 states versus 284 customers a year ago which is a 40% increase.

Noninterest expense for the second quarter of 2008 was up $333,410 or 4.8% from the first quarter of 2008, and up $2.3 million or 47.3% from the same period in 2007. Noninterest expense was higher than the first quarter primarily due to a $501,000 increase in the write-down of other real estate owned.

Noninterest expense was higher in 2008 compared with 2007 primarily due to incentive pay increases related to the significant growth of investment division revenue and costs related to other real estate owned and the workout of nonperforming loans.

The efficiency ratio was 89.57% for the second quarter of 2008, which was up from the 80.17% reported for the first quarter of 2008 and 71.21% reported for the same period in 2007.

While noninterest revenues have grown significantly over the last few quarters, lower net interest income and higher overhead expense have had an adverse effect on the efficiency ratio. We expect the efficiency ratio to improve during the second half of 2008, as the net interest margin begins to improve and we control the growth of overhead expense.

Credit quality continues to be a challenge in the current credit environment. Nonperforming loans were $50.7 million or 6.95% of total loans at June 30, 2008 compared with $19.7 million or 3.01% of total loans at March 31, 2008. Nonperforming assets were $53.4 million or 4.87% of total assets at June 30, 2008 compared with $23.1 million or 2.32% of total assets at March 31, 2008.

Nonperforming loans and assets were up from the first quarter of 2008 primarily due to the addition of three land loans totaling $12.3 million located in the Atlanta area and two condo projects totaling $21.4 million in Florida. While we believe we are well secured in each of these loans, due to the sharp decrease in real estate values in each of these market areas we established specific reserves for these loans totaling $1.5 million.

During the second quarter we reassessed each of our impaired loans and increased our specific reserves associated with certain of these loans due to further declines in real estate values. The allowance for loan losses was 1.62% of total loans at June 30, 2008 compared with 1.36% at March from 1.36%.

Greg, I'll turn it back over to you.

Greg Lee

Thank you, Jack. At this point I'd like to open the floor to questions from any of our participants.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from [Alex Paul] of Williams Financial Advisors.

Alex Paul - Williams Financial Advisors

Good morning, guys.

Greg Lee

Good morning, Alex.

Alex Paul - Williams Financial Advisors

I was just wondering if you could walk us through the philosophy, we understand that you are seeing great opportunity out there, but with deposits declining, credit costs are going up and you are growing the balance sheet while other banks are shrinking there's and that's part of where you are seeing an opportunity. But could you just walk us through the risk reward calculation you guys go through? And just the philosophy of it, because it just seems like it's little risky at the time, given credit conditions, so if you guys could just walk me through that, that would be great?

Greg Lee

Sure, we would be glad to, Alex. First of all I do want to take one moment. Our deposits actually grew there in the quarter, they did not plan. But the spirit of your question is, okay, in an environment like we've got, where credit conditions are strained, one unique thing about our business model is that we bank other banks, and banks are under pressure to monitor what their liquidity positions are under pressure or their capital levels and in effort to remain well capitalized, this guys have to sell loans they have got in that position. And we knew that would be the case. Toward the end of the second quarter it actually was much more ramping than we probably expected it to be.

We actually did put up these stops sign. If you will, and quit taking new loans, basically couples weeks ago we really just were flooded with requests. The compelling nature of these banks to sell loans basically allowed us to cherry pick the car loans that we could add. Now in the current environment, moving forward, we have some various and different strategic options available to us. Do we write additional capital? What is their capital cost?

Many of our competitors who are peers in this business and our primary competitors are facing the same exact strains that we are. And they are not able to purchase loans, as well, but we will. We have discussed many of the various options in front of us. Do we add additional capital? Do we shrink the balance sheet? Do we pull back all loans? Do we perform or do we do a combination of the above? And the answer is probably some combination of additional capital raising as well as a restrained or restricted loan growth moving forward. And we possibly will push down the size of our loan portfolio as we move forward. But that's a very reasonable question and we are being extremely cautious and have been and we are extremely cautious in the second quarter with those credits we added, Jack I'll turn it to you, if you got anything to add to that.

Jack Moran

Greg the only thing that I will say is that perceptively, Alex, I think we are going to be very careful about our growth, we don't anticipate growing at that same pace through the back half of 2008. And so, we are going to look for some good quality loans. We worked our construction and development portfolio down. And so some of these loans will provide us a bit of a better mix as those numbers pay down and we will be able to fund some loans with those pay downs. So I don't anticipate loans continuing at that same pace through the back half of '09 or '08 and we'll be careful with how we grow loans.

Alex Paul - Williams Financial Advisors

Okay. Great, I appreciate that. I have one follow-up, but first I apologize for reading the press release wrong that deposits were down, year-over-year not quarter-over-quarter. On the new loans you said that there are good credits, is that because they are in the owner occupied income producing bucket or do these individual burrowers seem particularly healthy?

Greg Lee

Ken, do you want to talk about that?

Ken Vassey

Yes. They are both, what we've been able to do is actually go into the banks loan portfolio and look for unusual loans that are not loans that are brand new, these are loans that have been on the books with these banks for several years. We are looking forward when we say owner occupied, we are looking for the orthopedic surgeons, people who walk with professionals that have 6, 8. 10 years of staying power in the business. And also there are the pricing on these loans. We are able to get better pricing, due to the fact that these community banks have got to pay to move these loans. I would imagine we probably looked for every one loan that we did we probably looked at five in the portfolios.

Greg Lee

It is a general dynamic, in the past you might have the following where banks picks a loan and they send them to us we'd say no, toward the end of the second quarter it was more along the lines of; hey, we've got to say something, you pick out what you want to buy, so you get a lot more selectivity, if you will, by watching good on our books.

Alex Paul - Williams Financial Advisors

Okay. Thank you, guys. And I will let somebody else have a turn. I'll jump back in line.

Greg Lee

Thank you, Alex.

Operator

Our next question comes from [Michael Schomer] of Raymond James.

Michael Schomer - Raymond James

Good morning.

Greg Lee

Good morning, Michael.

Michael Schomer - Raymond James

I was just wondering if you could discuss what the thinking was behind the forming of the special assets team now say versus six months ago when the problem credits were not rising?

Greg Lee

It actually was six months ago.

Kan Vassey

We put our special asset team together in January.

Michael Schomer - Raymond James

Oh you did. Okay. This is just the first time you talk about it or?

Greg Lee

I thought it was particularly appropriate to mention it at this juncture.

Michael Schomer - Raymond James

Okay. All right, great. And could your also discuss what happened quarter-to-quarter in the 89 days past dews and also the watch list?

Greg Lee

Okay. From the past due standpoint, out past dues declined significantly from the end of first quarter and the second quarter. Ken do you want to talk about the watch list quarter-to-quarter?

Ken Vassey

With what's going on in the market the watch list has increased quarter-to-quarter.

Michael Schomer - Raymond James

All Right. And have you seen any credit downgrades on the watch lease?

Ken Vassey

Yes. We have.

Michael Schomer - Raymond James

Okay. And given your outlook for elevated nonperforming assets and charge-offs; what gives you comfort that the margin will begin to improve?

Greg Lee

I'll touch on that break and then turned it to Jack and than Ken. From an asset, liability prospect of it and rates dropping. The declining rates at least recently have stopped that will allow us re-price liabilities, I think Jack even Included in the rise, in fact I know we did, some of the impact of the nonaccrual status is that it impacted our net interest margin.

We are limited to potential improvement in the short run, based upon the fact that we are impacted by the non accruals. But as we move forward depending of course, I mean there is some variability on where rates go, if rates stay where they are it should improve absent the credit issues. And of course if rates rise we are actually positioned for it to benefit and move higher, but from a core operating standpoint absent the credit issues, we do believe we should stabilize and potentially improve the net interest margins. And Jack I would like you to add your thoughts on that.

Jack Moran

Michael, if you take out the credit dynamics that I briefly mentioned earlier, our net interest margin was 2.49% in the first quarter, and 2.47% in the second quarter. We did expect a good bit more drop-off than that. But it did stay fairly flat. We still have a good number of CDs that are maturing, that we are able to re-price. Right now we are re-pricing CDs probably in about that 3.75% to 4% range. And most of the ones that we have running-off are in and around 5%. And so, we still have some benefit left there. The tougher thing to project is the effect of nonperformers respectively.

If you take that out, I think that in the core part of the margin we will see improvement in the third quarter. Now we did have in the second quarter, obviously, with the loan production that we have, we had very good loan fees. And then we also had a couple of bonds get called that we had booked. Some pretty good amount of accretion which benefited the net interest margins. But, I do expect some perspective improvement. Just with the competitive pressures on CD's and our money market rate, I just don't see us getting back to the same levels that we had grown accustomed to, at least in the near term.

Michael Schomer - Raymond James

All right. Are you still looking at the 2.19% range next year, that's still viable?

Jack Moran

It kind of depends; it depends on the competitive market. If the competitive market for CD's stays where it is, no. I think probably about as good a margin as we could hope for is probably 2.60% to 2.65%, without the credit dynamics.

Michael Schomer - Raymond James

Okay.

Jack Moran

That's how material the competitive pressures are right now.

Michael Schomer - Raymond James

All right, thank you. And switching gears a little bit here, as far as the investment services division, going forward what kind of a run rate do you think you expect their, so much as this quarters results or..?

Greg Lee

They have had a spectacular first half of the year, actually well ahead of what we had budgeted for them. I think it will be difficult for them to maintain the level. For the first quarter I don't see them maintaining that level, but back half of the year, we could come close to what we did in the second quarter, based on some initiatives we have got going, and some product lines we are offering, but it will take a yeoman's effort to keep it at the level it is now.

Michael Schomer - Raymond James

All right. Great. Thank you. And I will hop off here, thanks.

Greg Lee

Thank you, Michael.

Operator

Our next question comes from Jason Werner of Howe Barnes.

Jason Werner - Howe Barnes

Good morning, guys.

Greg Lee

Good morning, Jason.

Jason Werner - Howe Barnes

I guess, first just to kind of follow-up some of your earlier questions, could you quantify how much the loan fees were and how much the (inaudible)?

Greg Lee

Jack, can you address that if you can?

Jack Moran

Jason, the amount of income that we got from [caller] bonds was approximately $200,000. And our loan fees were approximately $600,000 and Ken you kind of correct me if I'm wrong there because I'm estimating.

Ken Vassey

That's between $500,000 and $600,000. That's correct.

Jack Moran

And in the first quarter that number was probably about $250,000.

Jason Werner - Howe Barnes

Okay. And then going back to the first caller, question about the capital rates, you guys do rate capital, what form would you think that would take? And then is it possible to go back to the trust preferred that you did to get back to same kind of a structure?

Greg Lee

Well, it depends on the cost structures and there are some great structures, the pricing of capital is been in flux from week to week, and I know you've been in touch with that watching it. We've raised trust preferred for many of corresponding bank customers. We've done many offerings for them. We've worked with them on sub-debt. There have been various banks do rights offerings. There have been convertible preferred offerings. And which route we would take or in which combination they rub, in addition to balance sheet management. At the current juncture we have not nailed it down to any one of the specific possible capital avenues, I hate to put it this way, but it depends on the cost.

Jason Werner - Howe Barnes

Okay. And you had mentioned about potentially getting some pay-downs in the construction book to help to replace that with some new loan growth. Obviously if we saw that at the end of quarter earnings it was down, almost $20 million. Looking at what's maturing and the health of borrowers, where do you think you can see that shrink in the second half of the year?

Greg Lee

A&D went down how much 7?

Ken Vassey

A&D went down a little over 7% right at $20 million.

Greg Lee

What do you think about back half of the year, any idea?

Ken Vassey

That would be a guess, but I would say we probably continue to see $20 million to $30 million per quarter, based upon the maturities that we have coming up right now.

Jason Werner - Howe Barnes

And those borrowers, do they have the capacity to make good on that?

Greg Lee

Yes. Right now the borrowers have the capacity to make those pay-downs.

Jason Werner - Howe Barnes

Okay. Obviously, you had a big drop in the past dues of 89 days delinquency, that gave you a lot comfort about NPAs going forward or what is your thought that, or is that just kind of may be misleading at this point and obviously its is kind of point in number and what's your thought on growth of nonaccrual loans kind of going forward?

Greg Lee

It definitely, is usually a harbinger of various things to come. And as a loan deteriorates from a performing loan, Jason, across the spectrum, if you will, to a nonaccrual or a charge-off that migration is not always a linear or a straight line process, it moves from performing to watch, to past due or trouble, to impaired and non-performing. We are scrubbing our loan portfolio very, very closely right now, in fact yesterday, most of the day we went through virtually every loan we have. I think it is a good sing no doubt. I do you think there are other loans that could move to non accrual status during the third quarter, but some of those we cant tell with great clarity at this point. I do think though, I will put this out, we've said all along probably several times, the second and third quarters of this year will be tough. I do not see I do not feel any different today than I did three months ago.

I think this quarter, based on what I know about debt process, as the loan moves, as it migrates down that chain based on what we see, I do anticipate an increase; to what magnitude? I can't tell you. But I do see NPAs increasing this quarter. Based on that vision as you look out two or three quarters, I do see it mitigating or declining after that. We are been pretty aggressive and we are not trying to be in denial, we are trying to be very proactive and basically more-or less stick our fingers down our throats and identify anything that looks questionable and reserve for it, charge it of, move it to NPA and an aggressive math. But I do see at least another tough quarter as I am looking out the front window.

Jason Werner - Howe Barnes

Okay. Could you give me generally how much of the NPAs are Atlanta and Florida?

Greg Lee

Yes, I can, I have got the list here, most of them.

Kenneth Vassey

Three in the Atlanta area. And then we have three in the Florida markets.

Jason Werner - Howe Barnes

The total of in the Florida market well on, thinking they are non-performing, is it what Ken?

Kenneth Vassey

Yeah, we have five in the Florida market. That would be, just doing the math in my head; six, $30 million estimated. I mean that's just looking at not getting to right down to the dollars and cents for a profit $30 million.

Jason Werner - Howe Barnes

Right.

Kenneth Vassey

And of that $30 million, one loan makes a half a bit.

Greg Lee

That's correct.

Jason Werner - Howe Barnes

Okay. So it is between the two markets that's over $40 million, that's obviously a good chunk of that, total non-performance at this point?

Kenneth Vassey

Yes.

Greg Lee

Right.

Jason Werner - Howe Barnes

What is the total exposure for Atlanta and Florida in terms of your total loan portfolio?

Greg Lee

We've got that broken down. Jack do you want to answer that, or do you want Ken to touch on that?

Jason Werner - Howe Barnes

I would like Ken to touch on that.

Kenneth Vassey

Currently in the Atlanta market we have $87.7 million in exposure and in the Florida market, we have $83.3 million of exposure.

Jason Werner - Howe Barnes

Actually that forward has grown quite a date over, over the (inaudible) I don't know, a year or so. That one was lots more I thought. Of those two numbers how much of it is, is residential plan development.

Greg Lee

We've got that broken down as well.

Jack Moran

In the Atlanta market we've got $44 million of that is land or potential land development, and then in the Florida markets it's -- was like it's about $60 million adding those two together. $60 million.

Jason Werner - Howe Barnes

Okay. Looking at near the stricter reserves you guys were talking about, you guys were talking about, you had said in the call because the numbers are right. Let see if I have my notes here, a bit -- five loans that were added this quarter. I think the number was $1.5 million specific reserves and that loan totaled I think, those loans totaled 33 million roughly, [58.7] million that would suggest I guess less than 5% kind of set aside. I am just kind of curious in terms of you get a new appraisal, what kind of hair cut are you taking on these loans. (inaudible) in terms of specific reserves in that amount alone. Guys what can you tell us about, what kind of head price you are seeing and appraisal values and how that you have been putting in your reserve.

Greg Lee

Sure. Just I am going to start kind of from a general and work that specifically. It is difficult for the appraisers in certain situations where there is – if they are in a market area, where there has basically been no activity for an extended period very difficult for them to come out with an accurate appraisal. Particularly in those instances we will add a good dose of how realistic we believe the appraisal to be. Of the ones that we now specifically of the ones that we added this quarter and really for most part the bulk of our non-performers are 10 loans.

Looking at the list right now and one of the loans that we added as I mentioned in my initial commentary is, it's about just over an $8 million in the Atlanta area, and we don't anticipate any loss whatsoever based on our loan-to-value which is very – we have got a very deep discount on our loaned value to the property and we have a second mortgage behind us of like sized. So a likelihood of loss on that is we think extremely low.

On the other properties that we added this time, on the large loan we have got a decent size reserve of approximately a million against it. But again on that loan if you ask my opinion on where we should fare their, we have one extremely strong guarantor behind it, that ultimately I think we will get our money out of that but it could, the time frame in which we do might be a little bit longer than the other ones. So it's true that the dynamic is unique for each and every loan that we put on.

Jason Werner - Howe Barnes

Okay so certainly, for the example of you doing $1, you would take that out of that total when you are calculating how much of that specific reserve is and that number goes up quite a bit. So basically what you have kind of gone through and get the best proposal you can and if the LTDs below 100% then you are done good, but still above that you are adding reserves.

Greg Lee

Yes basically, we get the most accurate, what we believe is an actual price, if we don't its accurate, we will apply other impairment type testing of our own against it. And also if I could end that number and again we had another loan for $8.5. So it's in the same situation with the $8 million, but we have a large sector behind us and if they are in, both that one and the $8 million work, we are working of a brand of appraisals.

Jason Werner - Howe Barnes

Okay, the total of the (inaudible) you are talking about with you in the call. You get two credits for 9.8 and you just paid no ops.

Greg Lee

Yes, that's correct.

Jason Werner - Howe Barnes

Okay.

Greg Lee

Yes and one thing and I will be closed. There is no construction risk on those. All these projects have been completed in their construction.

Jason Werner - Howe Barnes

Okay. Could you tell us what happened in the quarter in terms of look out some of the previous things. I shall recall, when we left off in the last call, we are going to auction off that building in Florida. Did that happen there after the booking hour? What's the status there?

Greg Lee

That's a good question. We went down multiple players and multiple properties. We did--attempted an auction on the building in Jacksonville. We did not get a satisfactory bid. So we did not sell it. There were some mitigating factors that cause that to happen that was going to amend and hopefully come up with a better result this quarter. We did auction-off and were successful in selling some of the fee store. We had the thirteen location fee store loan where the borrower passed away about over a year and a half ago. And we did successfully auction-off with four or five locations during the quarter. And that loan on our books down would be down to one, it would be in to auction.

Jack Moran

Right $1 million, yes. We have received our cash. With those locations have closed and we've received our cash.

Jason Werner - Howe Barnes

That loan is down to $1 million now, how many locations you have left?

Greg Lee

We have got five locations left.

Jason Werner - Howe Barnes

Okay. All right. I think that is all I have, I appreciate all the information.

Greg Lee

Thank you, Jason.

Operator

Our next question comes from Alex Paul of Williams Financial Advisors.

Alex Paul - Williams Financial Advisors

Hi, guys. Thanks for taking another question. Two more, on the press release you talked about, hopefully finding a way to shrink overhead, can you talk about the initiatives that you will be go through on that? And the other question and then I will just listen is, on the holding company loans that you guys made in the quarter, can you talk a little bit about the health of the bank you made those loans to, in the current environment just a particular concern? Once again thanks you for taking the questions.

Greg Lee

Sure no problem, Alex. On expense reduction David Long, who is on the call today, along with myself and Jack Moran are meeting regularly to review all overhead noninterest expenses in all of our division, which we see anyway, we've done it on a regular basis since we started. In '07 we were at the, as we set out in the last year, we aggressively expanded into a few new areas and the investment in our investment division say that carefully, has turned out to be a great decision for us and it is yielding better results. Some of our other init are moving a little more slowly, clearly in an environment were margins are depressed and credit concerns are as really as they are, nothing is sacred. And by that I mean, any line item of expense that we can trim that's not adding to the bottom-line in this environment, certainly something that we have to consider. We don't have any mass layoffs or anything like that or even minor layoffs of anything lined up to this point, but as we move through this cycle we will be looking with a short pencil at each and every noninterest expense item we have got. Jack, do you have any other thoughts.

Jack Moran

No, Greg, other than that, really what we are attending to do Alex is control overhead growth we are not really looking to make reductions. I think that's the way that we framed it in press release is, is that we are not doing expansion efforts or anything that would grow our overhead. We are definitely controlling overhead growth frames.

Greg Lee

Okay. What was the back half of your question?

Alex Paul - Williams Financial Advisors

On the holding company loans, could you just talk about the health of those bank borrowers in the current environment?

Greg Lee

Yes, absolutely. We scrub the loan review or loan analysis, if you will rather, of the under writing of each bank very closely. We feel very good about the holding company loans and bank loans that we did make here in the quarter. Very good Ken you want to add any color?

Ken Vassey

Just to give you a little bit of color. The majority of loans that we did were outside of our southeast region. We looked to do several in the mid west and several in the south west. One of the things that we also do, all of the holding company loans we do we require third party loan review and we, as Greg said, scrub those and look at those very-very carefully. In this environment we have turned down more holding company loans probably in the last 60 days, than I have in the last 20 years.

Alex Paul - Williams Financial Advisors

Okay.

Greg Lee

I know everybody's got their (inaudible) if you will in this credit environment particularly we do here as we are trying to make sure we manage this aggressively as we can to move the bad credits through, get them off our books and bring out all the value you can of each them. But there is a unique opportunity there are still plenty of very good solid banks that we deal with. They are making good solid loans. While a lot of banks have basically shutdown and quit making loans, particularly postponed participation loans, there is a unique opportunity because of the niche that we serve, there are just practical limitations and strategic limitations to how much we can take advantage of that moving forward.

Alex Paul - Williams Financial Advisors

Okay. Thank you, guys.

Greg Lee

Yes sir.

Operator

Our next question comes from Jason Werner of Howe Barnes.

Jason Werner - Howe Barnes

Couple of follow-ups, again the bank holding company loans, how much of that did you add this quarter and what is the total portfolio now?

Greg Lee

Okay. Ken, if we get that added up actually, for the actual quarter. Bear with us, just a minute Jason.

Jason Werner - Howe Barnes

Okay.

Ken Vassey

$30 million.

Greg Lee

That is what we added during the quarter?

Ken Vassey

That is for the quarter.

Greg Lee

And the total of our bank holding company loans or stock loans?

Ken Vassey

It is $48.4 million at the end of the quarter. It is the net active balance some of these loans are lines of credit so they wont be fully drawn. The $30 million would be the committed amount of those holding company loans.

Jason Werner - Howe Barnes

Okay. All right. And then I had a question also about the owner-occupied income producing re-loans that you are buying. You had said that you are getting a favorable rate on these. Are you guys able to buy this at discounts or have you buying them higher, I mean how do you get that favorable rates?

Ken Vassey

We buy them at particularly. And in the past we were able to just look at their loan portfolio, look at their general ledgers and just pick up the rates that we want. We are picking up a higher rate owner-occupied loans.

Jason Werner - Howe Barnes

Okay.

Ken Vassey

We pay part of these.

Jason Werner - Howe Barnes

Okay. So in terms of having up set up reserves for that, that's included in the provisions which you guys are reporting then.

Ken Vassey

That's correct.

Jason Werner - Howe Barnes

Okay. Thank you, guys.

Greg Lee

Yes, sir. Thank you, Jason.

Operator

(Operator Instructions) We show no further questions at this time. I would like to turn the conference back over to Mr. Lee for any closing remarks.

Greg Lee

Thank you, Ryan. I would just like to thank everybody for their participation today. We appreciate your investment, your interest in the company. We look forward to talking to you again next quarter. Hope everybody has a great day, and a great weekend. Thank you, Ryan.

Operator

Thank you. That concludes our presentation. You may now disconnect.