Jul 22, 2008
Executives
Henry L. Meyer - Chairman and Chief Executive Officer Jeffrey B.
Weeden - Chief Financial Officer Beth E. Mooney - Vice Chairman and Head of Key Community Banking Chuck Hyle - Chief Risk Officer Thomas W.
Bunn - Vice Chairman of Investment Banking and Head of Key National Banking
Analysts
Brent Erensel - Portales Partners Gerard Cassidy - RBC Capital Markets Nancy A. Bush - NAB Research LLC Matthew O’Connor - UBS Betsy Graseck - Morgan Stanley Seriph Karenske - Cambridge Place Investment Management David Pringle - Fells Point Research
Operator
Good morning everyone and welcome to KeyCorp’s Second Quarter 2008 Earnings Results Conference Call. The call is being recorded.
At this time, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Henry Myer.
Mr. Myer, please go ahead, sir.
Henry L. Meyer – Chairman and Chief Executive Officer
Thank you, operator. Good morning and welcome to KeyCorp's second quarter earnings conference call.
Joining me for today’s presentation is our CFO, Jeff Weeden. Also joining me for the Q&A portion of our call are Vice Chairs Tom Bunn and Beth Mooney and our Chief Risk Officer Chuck Hyle.
I would like to turn your attention to slide #2, which is our forward-looking disclosure statement. It covers both our presentation and the Q&A portion that will follow.
Now you turn to slide #3. Before Jeff goes over the numbers in detail, I want to make just a few comments on several issues that are always important for banks, but are particularly noteworthy in the current environment.
#1, our costs are well controlled. As you know if you have followed us for any length of time one of our top objectives has been to control expenses and improve our cost ratios on a continuing basis consistent with our growth strategy and conditions in the market places.
I believe you can see that that objective continuing to be reflected in today’s results. Our fee revenue is strong.
We experienced strong results in several of our fee revenue areas including trust and investment services, investment banking, and loan syndication fees. These areas are built on continuing relationships with our clients.
With the actions we took in the first quarter to reduce risk in our held for sale books, we also saw a strong rebound in gains from loan sales in the current quarter. Our reserves are strong.
In spite of the continued deterioration of market conditions during the second quarter and putting aside for just a moment the adverse impact of the Federal Tax Court ruling and certain of our lease financing transactions, our cautious and conservative reserving philosophy gives us significant balance sheet strength for credit uncertainty in the coming quarters. Returning to the tax court decision, I want to call special attention to our decision to vigorously appeal the decision.
We have come to the conclusion that the confidence we had in the original position taken by our leasing and tax experts was well placed and that an appeal will be in the best interest of our shareholders. We remain well capitalized.
I am sure many of you have seen Moody’s report that was distributed to Moody’s subscribers last week and is available on Key.Com. This was a timely signal to the investment community and to our clients and employees that Key is fortified against further deterioration in this credit environment.
It’s also important to note that our capital ratios are at a comfortable margin above regulatory standards, so that we continue to be considered well capitalized. Well our professional and institutional investors have a good understanding that Key is in a safe and sound condition, industries headlines have generated environment of some indiscriminate concern in the general population.
I have great confidence when I tell Key depositors that we are a sound financial institution with a strong balance sheet. There have been many, many economic cycles throughout our history and Key has always been a safe place for our clients.
We pledge to keep it that way. Now I will turn the call over to Jeff for review of our financial results.
Jeff?
Jeffrey B. Weeden - Chief Financial Officer
Thank you, Henry. I will begin with financial summary shown on slide #4.
My comments today will be with respect to Key’s results from continuing operations and I will focus on those results excluding the leverage lease impact. These results are identified as adjusted figures and are more representative of Key’s performance during the second quarter.
In some cases our comment on comparisons to both the second quarter of 2007 and the first quarter of 2008. As addressed in our earnings release, the second quarter was not only impacted by the leverage lease adjustment but also by the continuation of the credit cycle.
We did experience a number of positives during the second quarter. However, they were overshadowed by the lease adjustment and higher credit costs.
For the second quarter of 2008, we reported a loss of $2.70 per share from continuing operations compared to the income of $0.85 per share for the same period one year ago. On an adjusted basis excluding the impact of the contested leverage lease transactions, we incurred a loss of $0.28 per share as a result of higher credit cost.
Slide 5, identifies the impact of the leverage lease adjustment on specific line items of the income statement. The two areas that are impacted by the adjustment are net interest income and the tax provision.
Approximately two-thirds of the FAS 13-2 lease accounting adjustment which is the $838 million of net interest income less the tax of $302 million on the leverage lease income for a net amount of $536 million were reversed back into income over the remaining lives of the impacted leases. Some of these leases go out as far as an additional 20 to 30 years.
Based on these contractual maturities, the company does not expect a reversal of income to be material in any given year. The remaining adjustment on this schedule is the $475 million after tax interest approval for all of our leverage leases impacted by the adverse court ruling.
Until these contested liabilities are ultimately resolved Key will continue to accrue an additional tax provision for interest on these balances in addition to the normal tax provision on income before taxes. We currently estimate this quarterly amount to be in the range of $32 million to $34 million for the third and fourth quarters of 2008.
Turning to slide #6, the company’s adjusted tax equivalent net interest income for the second quarter of 2008 was $738 million, up $32 million from the same period one year ago. For the second quarter of 2008, our adjusted net interest margin was 3.32%, down from 3.46% we reported in the same period one year ago and up from the adjusted 3.29% we reported for the first quarter of 2008.
Our expectation for the net interest margin is for it to decline approximately 10 to 15 basis points from the current level for the balance of the year as a result of the lease adjustment and the continued competitive pricing pressure for deposits, which is offsetting better yields on new asset generation by the company. Slide #7 highlights the changes in non-interest income between the quarters shown.
We continued to experience strong growth in trust and investment services income driven by both, Victory Capital Management on the institutional side and brokerage in the community banking operations. Deposit service charges increased as a result of increased activity charges from annualized commercial deposit accounts and investment banking and capital markets revenue increased from both the first quarter of this year as well as from the same period last year as a result of improved execution, market conditions and the measures we took in the first quarter of this year to reduce further risk in our trading activities.
The first quarter measures taken to reduce risk also showed benefits in the loan securitization and sales line item which bounced back to a net gain in the second quarter of 2008. Turning to slide #8, total non-interest expense remains well controlled.
We continued to monitor our expenses as we worked through the challenging times in the credit markets. We did experience higher professional fees experience as a result of increased collection efforts on loans.
Turning to slide #9, average loans from continuing operations increased approximately $10.4 billion or 15.7% from the same period last year and we are up $4 billion compared to the first quarter of 2008. Impacting average balance comparisons to the same period last year and the first quarter of 2008 was the transfer of $3.3 billion of student loans at the end of the first quarter from held for sale to the portfolio loans.
Adjusting for these balances, average total loans increased approximately 4% annualized from the first quarter of 2008. As of January 1, 2008, the company also added approximately $1.5 billion of loans from the acquisition of Union State Bank.
Adjusting for these balance and the student loan transfer average total loan balances increased approximately 8% from the same period one year ago. Our outlook for average total loan growth of a linked-quarter basis for the balance of 2008 is to be down slightly to relatively flat as we continue to work on reducing outstandings in our residential property segment of the construction loan portfolio and in other portfolio where the risk reward opportunities appears inadequate given the market conditions.
Turning to slide #10, average core deposit balances are up $1.7 billion or 3.4% compared to the same period one year ago and are relatively flat compared to the first quarter of 2008. Included in this year’s balances are approximately $1.7 billion of core deposit associated with the Union State Bank acquisition.
Competition for deposits in our market place remains strong, we did experience growth in personal DDA balances within the community bank during the second quarter compared to both the same period last year and the first quarter of this year. Corporate DDA balances are down slightly compared to both the last year and the first quarter, however, activity charges as reflected in our second quarter deposit service charges increased as customers paid for these services through fees rather than balances as rates decline.
Our expectation for core deposit growth remains in the low single-digit range for 2008 as we expect competition to remain high for deposits given the elevated funding costs for banks in general in the capital markets. Slide #11, shows our asset quality summary.
Net charge-offs in the quarter were $524 million or 2.75% of average loans on an annualized basis compared to $121 million or 67 basis points in the first quarter of 2008. Nonperforming loans at June 30, 2008 totaled $814 million and represented 1.07% of total loans.
Total nonperforming assets at June 30, 2008 were 1 billion 210 million dollars or 1.59% of total loans other real estate owned and other nonperforming assets. Nonperforming assets include $342 million of commercial real estate loans that were charged down in the second quarter and placed in a held of sales status.
Since the end of June we have closed a number of sales with respect to these loans and expect to close on the sale of the majority of these loans during the third quarter of 2008. Our total reserve for loans losses rose to $1 billion 421 million dollars and represented 175% of nonperforming loans at June 30, 2008.
On the next three slides we have provided some additional information with respect to asset quality statistics for the second quarter of 2008. Slide #12, provides additional information on credit quality by portfolio for the second quarter.
We continued to see migration of credit in the second quarter with loans tied to exposure to residential construction. This impacted the C&I portfolio within real estate capital line of business and leasing.
These portfolios experience both an increase in net charge-offs and nonperforming assets. Within our consumer portfolio we experienced an increase in charge-offs in the education lending portfolio tied to a group of loans related primarily to trade schools or nontitle4 institutions.
This portfolio stood at approximately $780 million at June 30, 2008. Losses on this portfolio were exceptionally high in the second quarter as we put in place a new collection routine to bring down delinquencies.
I would also note that this is a portfolio where we stopped originating new credit back in 2006. Within this portfolio, we expect credit losses to remain elevated.
However, below the levels we experienced in the second quarter as we were changing collections routines. Our home equity loan portfolio within community banking continued to perform well and as expected during the second quarter with little change in overall credit statistics from the first quarter of this year.
We have a further breakdown of this portfolio in the appendix of today’s materials for your review. Turning to slide #13, we have put together a summary of our commercial real estate portfolio by property type, by geographic location.
The residential properties category of this portfolio accounted for much of the higher level of net charge-offs we experienced in the second quarter. Turning to slide #14, we provide additional details on this category.
Our residential commercial real estate balances continued to decline in the second quarter versus the first quarter as a result of moving $719 million or $384 million net of the respected charge-offs of these loans to a held for sale category during the second quarter and also payments that were received on other loans. As we have discussed from the past several quarters Southern California and Florida have been the most difficult markets for us with respect to residential properties, these have been the markets where we have focused much of our attention over the past four quarters.
This is also when we saw the biggest decline in outstanding balances during the second quarter as a result of our plan to sale of loans. Looking at slide #15, the company’s capital ratios are all in the upper half of our targeted ranges from the respective ratios as noted on this slide.
Our tangible capital to tangible asset ratio was 6.98% and our tier one capital ratio was 8.49% at June 30, 2008. I would also note that on July 11, we closed on an additional $90 million of capital from the underwriters’ exercise of the overall admin option.
Had this capital existed as of June 30, 2008, it would have added approximately 9 basis points to these ratios. As Henry said in his remarks our capital accounts are in good shape, well-above regulatory requirements for being well-capitalized, and they provide us with the necessary strength and flexibility to serve our clients.
Slide #16 is a summary of our updated outlook for selected items for the second half of 2008. Now, before I turn things over to the operator for questions, I wanted to let you know that Vern Patterson, head of Investor Relations at Key, is going to be out of the bank for a period of 4 to 6 weeks due to illness.
We wish Vern and his family the very best and look forward to his return to work. That concludes our remarks and now I will turn the call back over to the operator to provide instructions for the Q&A segment of our call.
Operator.
Operator
Thank you very much. [Operator Instructions].
Our first question of the morning goes to Brent Erensel at Portales Partners. Please go ahead.
Brent Erensel
Good morning. Question on a commercial real estate portfolio.
You have the sale of $700 million plus and then you have payments and yet the decline in the owner occupied -- sorry non-owner occupied portfolio is vest in that, can you explain that and what do you think the last content is in that remaining portfolio?
Jeff Weeden
I think in terms of -- this is Jeff Weeden, when we look at the portfolio we also commitments that are outstanding and of course the projects that are continuing and so you will draws on some of the commitments that are existing on project. We had payments that did come in on various projects, the $719 million that we transferred on out during the course of the quarter, of course, came primarily are going to come from the residential property section.
So, we have continuation in the total non-owner occupied in the income properties area of the portfolio. I think when we saw the largest decline it went down approximately $900 million in the residential property section between the first quarter of 2008 and the second quarter of 2008.
So that’s primarily where I would concentrate, we are still doing business in the other areas of commercial estate.
Brent Erensel
And real quickly if you just back up the losses on the reserve build, you get some sort of operating range of earnings between $0.16 and $0.30 per quarter, do you have any comment on that?
Jeff Weeden
No, our comments are related to the specific line items that are given in the back on slide #16 of our presentation.
Brent Erensel
Okay. Thank you.
Operator
[Operator Instructions]. And we will go next to Gerard Cassidy at RBC Capital Markets.
Please go ahead.
Gerard Cassidy
Thank you and good morning. I apologize if you’ve addressed this, I had to jump off the call for a minute.
In the loan sales that you had of $44 million in the commercial real estate area, what was the booked value of those loans where you received $3 million or $4 million in proceeds from?
Jeff Weeden
Well, I think what we are talking about Gerard is in total we are including that 44, $719 million if you look at the fact that we moved $384 million it would equate to approximately a 53% realization factor on the portfolio. So, with respect to those that have actually closed I don’t have that specific information, I’ve looked at it more in the aggregate in total, in it will very obviously property by property.
Gerard Cassidy
Okay. So, essentially $0.53 on the dollar is the fair number then?
Jeff Weeden
That’s the fair number for the portfolio that was identified for sale during the second quarter and moved to a held for sale category or part of loans actually closed on that portfolio in the second quarter, that’s correct.
Gerard Cassidy
Yes, correct. And I recall most of those residential construction or there some other construction in, in as well?
Jeff Weeden
Those were in the residential construction portfolio only.
Gerard Cassidy
Okay. And then, second, the margin obviously you guys reported that a higher net interest margin in the quarter similar to your peers, I see in your other page, on page 16 that the margin forecast is actually lower for the second half of the year than the second quarter can you give us color on that why its directionally going that way?
Jeff Weeden
Gerard, it would relate specifically to the accounting treatment surrounding the leverage lease transactions that is putting pressure on it is got reconstruct going forward. The yield volume dropped significantly.
If we pull that out as, I think we did on page to give us a better flavor for the true net interest margin, which is 3.32% could you give us an estimate of what that would be with out there was leverage leased you know the impacts?
Henry L. Myer III
Yes it would be relatively flat, so we would still be around the 3.3 range.
Gerard Cassidy
Okay, great thank you.
Operator
Our next question goes to Nancy A. Bush with NAB Research LLC.
Nancy A. Bush
Good morning and if you could just clarify on sort of switching between the calls here, you said $32 million to $34 million for quarter is that the impact of that leverage lease transactions.
Henry L. Myer III
That $32 million to $34 million Nancy is the after tax cost of the interest accrual on the disputed balances with the IRS.
Nancy A. Bush
Okay, and Henry you had mentioned sort of the indiscriminate panic I guess among the populas at that time of to sell your IndyMac and I assume that for you are alluding to. Had you have to raise your deposit cost that all given the particular challenges of your region and if you could just comment about the whole comparative environment there right now?
I would appreciate it.
Henry L. Myer III
Yeah Nancy -- I made that comment because there are a lot of media stories about FDIC insurance and there is a lot more interest by our depositors but on that reported that we actually grew our deposits last week, so we are not seeing runs locks or any concerned but our plans and I think plans generally which is what my comments were aimed at are really trying to understand better what insured what FDIC insurance is all about how you spread accounts all that kind of, all those kinds of issues but I think important thing is that last week our deposits actually grew. To the other part of your question Nancy it is a very competitive market place out there and it is not like those deposits grew for free but we are paying, we are not trying to buy the market place either.
Nancy A. Bush
Thank you.
Operator
And our next question goes to Matthew O’Connor of UBS. Please go ahead.
Matthew O’Connor
Good morning
Henry L. Myer III
Good morning
Matthew O’Connor
Just to clarify the tax part of 32 to 34 per quarter for back half of the year, is that go away in 2009.
Henry L. Myer III
No it does not that will continue on and of course little varied depending upon interest rates that are charged on those particular accruals until those amounts are either resolved in the form of a deposit with the government or they result in a different fashion where we prevail on appeal of our tax case.
Matthew O’Connor
Okay, now I guess just an aggregate, what is the total amount if you have a deposit or something?
Henry L. Myer III
We have not disclosed that, but I think if you go back and look, there was the $1.7 billion of deferred taxes related to the leverage lease transactions and then of course, the interest on top of that so the $475 million was an after tax accrual, so you would have to gross that up, add that on top of the $1.7 billion.
Matthew O’Connor
Okay, and then secondly, I think there is a lot of talk about consumers being very sensitive to their deposits in this kind of environment, but I am wondering from a commercial side, we hear about lines being cut at some other banks. I am just wondering if that causes some commercial customers to lose their deposits and if you are seeing any deposits up for grabs out there that you might be able to grab?
Henry L. Myer III
Beth, do you want to comment?
Beth Mooney
Yeah, Matthew I will tell you that it is a highly competitive environment and we do see and are staying very close to our clients in good prospects in our communities and in our various markets and are opportunistically taking share of our clients as well as those in other institutions. We have not in our book cut or reduce lines to any of our clients and we will continue to call on our competitors with good prospects to try and garner more deposits and more relationships.
Matthew O’Connor
I don’t know if there’s a rule of thumb, but do we tend to see the credit relationship move first, that’s one thing that we are seeing as some pretty good commercial loan growth out there and I wonder if the deposits will follow?
Beth Mooney
Mathew, I would follow up and say that it varies. It depends on how you have been calling on a company and presenting the opportunity to do business, but often times they do lead with credit opportunities that chance to build a relationship.
Matthew O’Connor
But, we do want the full relationship and customers will get our better pricing if we get the full relationship. So, we are not interested in just credit only.
We want a total relationship that’s our strategy, that’s what it is built around.
Tom Bunn
Matthew, it’s Tom Bunn, I would add to what Beth said in that we have seen successes in our treasury management capabilities and to Beth’s world, from the community bank down to the business banking client as well and that builds deposits as well. So, I think when you combine our relationship approach with our treasury management capabilities and as Beth said the whole approach of cross selling and if you are seeing that as an opportunity in this market.
One other comment I would suggest is that again accurately what Beth said taking it across my world as well. Clients there exiting this bank tend to be client that we want to exit this bank right now from a credit exposure standpoint.
We are not seeing any departure of clients that are good relationship clients they we’re working to keep.
Matthew O’Connor
Okay, great, thank you.
Operator
And we will go next to Betsy Graseck of Morgan Stanley.
Betsy Graseck
No problem, Hi, good morning. Couple of questions.
One, on the reserving, when you are running your reserve analysis are you factoring any deterioration in home values from here and your numbers?
Chuck Hyle
This is Chuck Hyle. Yes, we are, and in fact over the last 4 to 6 weeks, I would say that our view of the residential home markets have deteriorated a little bit more.
More in terms of pushing at a recovery rather than anything else more dramatic than that and that is reflected in the way we look at our reserving market by market.
Betsy Graseck
Can you give us the sense as to what you are anticipating from here, if it is built already into your reserve?
Chuck Hyle
Well, I am not quite sure how to put it into numbers for you because it really is determined on a case by case basis, the type of loan it is, where it is located, the market itself, we are doing an enormous amount of analysis individually. But clearly, on some of the land only situations many of which we have always sold in this portfolio we have just dealt with the discounts can be fairly dramatic, 50% give or take.
If it is a completed project, in a better location that will obviously vary but clearly where we are pushing out our views in terms of when the housing market is going to bottom and that is reflected in our reserving.
Betsy Graseck
And, is there anything that you are doing to hedge your portfolio at all?
Chuck Hyle
In terms of credit risk?
Betsy Graseck
Yeah.
Chuck Hyle
Clearly, we hedge on the CMBS side what we hedge credit risk in that portfolio. We do use the credit derivative market in the corporate side of the business.
It’s a little more difficult to do in pure real estate. We have done some modest hedging through indices but that’s a fairly small number in our organization.
Betsy Graseck
And against the [res-e] portfolio?
Chuck Hyle
A little bit on indices, but again not really a lot.
Betsy Graseck
Okay, on the loan growth that you presented your slide on each 8 or 9 the consumer growth that you are getting and could you just indicate what bucket set is coming from at this geographically based more than product based that’s fine.
Henry Meyer
Beth will comment a little bit on that. We are seeing some growth with respect to our home equity portfolio and its I think more of the growth has been coming in the Western Markets as well as so it would be the Rockies on the specific North West is where we were seeing some of that on the consumer side of equation.
The other consumer books of course are relatively flat, so if you look at some of indirect portfolios; those are flat and we have those are some of the portfolios that I talked about our that our expectation would be that flat to down slightly as it become more selective on the credit there, another area where we were becoming very selective on credit off course just because of the spreads, would be in the leasing portfolio. You will see the that’s down slightly also and just a matter of function of the marketplace of what can get for return from that business, Beth is there anything you want to talk about a geographic area.
Beth E. Mooney
Betsy I would just underscore that we have had modest consumer loan growth in the community bank are primarily through our growth and our equity portfolios concentrating mainly in our Western Market and as you can see in the appendix in our supplemental credit slide that is largely half of first lean position portfolio, as well as extremely high cycle scores and judicious use of loan to value. So again we continue to monitor both the quality of our new offerings in our growth and we would say that we have seen the best growth in our Western Market.
Betsy Graseck
And would you say that’s more a new client acquisition or draw downs of existing lasting lines?
Beth E. Mooney
We have seen an increase in draw downs to some extent but another trend that we have seen that is difference and where we would have been last year if the rate of pay downs on line has slowed. The more of our acquisition of clients and expansion of relationships is going to the balance sheet as a result.
Betsy Graseck
Okay and just one last question on NIM and how are you thinking about your investments and securities at this stage, is there any interest in, in a potentially moving up the NIM through use of the balance sheet?
Jeffrey B. Weeden
Well, I’ll have Joe Beta comment on that, but I would say that we have no intention of expanding our investment portfolio at this time. As you know, we mainly manage our interest rate risk position through the use of Corp balance sheet swaps received fixed a pay a variable and this with the swap in the yield curve obviously and the number of swap positions that we put on last year in anticipation of the declining rate environment, that’s actually benefiting the margin here in the 2008 time period, so Joe anything else you would like to add to that?
Joseph Vayda
Only that we mange the investment portfolios as part of our overall, a liability management position and it is not drawn as a rate of return portfolio, over in the context of our overall AL management position, the preferred instrument of choice as Jeff said is interest rates swaps to rebalance our rate sensitivity as necessary, and we do strive over longer period of time to be very much neutral with a bias to advance slightly liability sensitive.
Betsy Graseck
Okay. Could you see an opportunity that improved the NIM, at all in the next few quarters here?
Jeffrey Weeden
Well our guidance that we provided for on the NIM was really that it could under some pressure as a result of the re-characterization of the leverage leased transactions.
Betsy Graseck
Al right
Jeffrey Weeden
Excluding that It would be relatively flat in the primary reason for being relatively flat as I think there is a just competition for deposits and certainly the price of turned financing is elevated for the industry as a whole.
Betsy Graseck
Okay thanks.
Operator
And we’ll go next to Seriph Karenske from Cambridge Place Investment Management. Please go ahead.
Unidentified Speaker
Asked and answered. Thank you.
Operator
Al right thank you and we’ll go next to David Pringle at Fells Point Research. Please go ahead.
David Pringle
Good morning could you talk a little bit about the dynamics with 30days, 89 days past to declining in the quarter first?
Jeffrey B. Weeden
The decline, decline in that portfolio was primarily related to the commercial real estate book of business though I guess we were encouraged David by the fact that we experienced the nice decline in that area approximately $300 million so that for the decline came to the other areas remain relatively stable.
David Pringle
And what’s your outlook for that Jeff?
Jeffrey B. Weeden
Well I can let chuck’s comment on that, but the outlook is really where continued to remain focused on those near term delinquencies and work with our clients and keep the payments coming in.
Charles Hyle
Yeah David I would just add that we had been very, very focused on this portfolio not just the residential commercial real estate but really across all portfolios looking for sort of early warning signs of deterioration and back to a comment made earlier by Jeff and also by Tom, we had been encouraging certain customers to move to other institutions and when I think we are beginning to see a little bit of that positive impact in the 30 to 80/90 bucket. Clearly the most impact is from the residential commercial real estate sale.
David Pringle
Thank you, Jeff.
Operator
And we do have a follow up question from Gerard Cassidy at RBC Capital Markets. Please go ahead.
Gerard Cassidy
Thank you for taking the follow up. Regarding the nonperforming asset in this current quarter about 1.2 billion now, I noticed there was a sizable increase in the commercial financial and agricultural category to $259 million from the 147 in the prior quarter and at the end of the year about $84 million, could you guys share with us what you are seeing in that side of the business not the real estate related stuff, which has been well documented but now it looks like more of the C&I issues that might be developed, excuse me, developing here?
Chuck Hyle
This is Chuck. Again let me try to take that one, there are couple of pieces to that to that question, when as we are saying a little bit of an up tick in leasing related assets these are transactions that are booked as loans rather than as leases but they come through our leasing division and that is a part of that.
The other piece is we do have a small portfolio of residential, real estate related exposures that by virtue of there being unsecured when they are executed and also by virtue of loans being to entities, corporate entities rather than projects are really residential real estate assets. That total portfolio is about $300 million give or take, there were not a large portfolio but it does show up in the C&I category, though about $75 million of that increase of about a $112 million in the C&I category is related to that portfolio so it really is essentially an extension of our residential real estate book that just happens to show up in C&I.
A lot of that exposure is to National Home Builder type names, but there are few that are more lot project type and not just the categorization issue. So, having said that I would say that our base C&I portfolios, the institutional side of the business and our middle market and business banking continued to perform quiet well.
So that up tick is really not a reflection of those portfolios.
Gerard Cassidy
Okay, thank you. And certain in back to the leasing loans that you identified is there any particular category within leasing that if this, you have noticed this more problematic than other areas within leasing?
Chuck Hyle
Yeah, there are two one is which is referenced before the small tickets, side of things particularly commercial vehicles and construction again relating to the residential side of things and you will pick up the theme. And, the other is actually small aircraft generally purchased for individuals where we have seen some degradation in the borrowers.
Again, many of these are individuals who where in the real estate business, developers, people of that type who purchased small aircraft two, three, four years ago and join the boom. So, we are seeing some NPLs there, but the good news is that the recovery rates on those aircraft continued to be very strong, prices have held up exceptionally well and we don’t see any indication if that’s going to change.
So the NPLs are up but the last content we think is quite small.
Gerard Cassidy
Thank you.
Operator
And, Mr. Myer with no other questions in the queue, I’d like to turn the call back to you for any closing comments, sir.
Henry L. Meyer
Thank you, operator. Again, we thank you all for taking time from your schedule to participate in our call today.
If you have any follow up questions on the items we’ve discussed this morning please don’t hesitate to call John Schulman who is helping out in Vern’s absence and John’s number is 216-689-3882, or Chris Secora who works with Vern in our Investor Relations Department and his number is area code 216-689-3133. That concludes our remarks and again thank you for your participation.
Operator
Thank you. That does conclude the call.
We do appreciate your participation. At this time you may disconnect.
Thank you.