BankUnited Inc (BKU) 2007 Q4 法說會逐字稿

Good afternoon and welcome, ladies and gentlemen, to the BankUnited fourth quarter conference call. At this time I would like to inform you that all participants are in a listen-only mode. At the request of the Company, we will open up the conference for questions and answers after the presentation.

This conference call may contain certain forward-looking statements which are based on management's expectations regarding factors that may impact the Company's earnings and performance in future periods. Words and phrases such as will likely result, expect, will continue, anticipate, estimate, project, believe, intend, should, would, may, can, could, plan, target, and similar expressions are intended to identify forward-looking statements. Actual results or performance could differ from those implied or contemplated by such statements.

Factors that could cause future results and performance to differ materially from current management's expectations include, but are not limited to, general business and economic conditions, either nationally or regionally, fiscal or monetary policies, significant weather events such as hurricanes, changes or fluctuations in the interest rate environment, a deterioration in credit quality and/or a reduced demand for credit, reduced deposit flows, and loan demands, real estate values, competition from other financial service companies in our markets, legislative or regulatory changes including, among others, changes in accounting standards, guidelines and policies, the issuance or redemptions of additional Company debt or equity, the concentration of operations in Florida, if Florida business or economic conditions decline, reliance on other companies for products and services, the impact of war and the threat and impact of terrorism, volatility in the marketplace of the Company's common stock, and other economic competitive servicing, capacity, governmental, regulatory, and technological factors affecting the Company's operations, price, products, and delivery of services. Please refer to the documents that BankUnited Financial Corporation files periodically with the SEC such as the form 10-K, form 10-Q, and form 8-K, which contain additional important factors that could cause its results to differ from its current expectations and from the forward-looking statements.

I will now turn the call over to Alfred Camner, Chairman and Chief Executive Officer of BankUnited.

Thank you for joining us on today's call. Joining me this afternoon are Ramiro Ortiz, BankUnited's President and Chief Operating Officer, Bert Lopez, our CFO, and Jim Foster, Senior Executive Vice President of Corporate Finance. We'll begin the call with a brief overview of our results for the year and quarter and spend the duration of our time together responding to question.

Most of the earnings news this season has been fairly negative. At BankUnited we have many things to be proud of including solid earnings for the fiscal year and double digit percentage growth in total and core deposits. Our overall results were definitely impacted by the economic climate. Clearly, the credit and mortgage situation has hit financial institutions harder and more quickly than anyone anticipated. Succeeding in this type of turndown -- downturn, requires focus and experience. Our executive team has an average of 26 years in Florida banking and we have all been through these cycles. We are building a strong Florida bank complimented by a national residential mortgage lending business. It is still the right strategy and we're committed to performing our way through this cycle.

Our strategy has six prongs. First is serving the micro markets around our 86 branch locations with competitively priced products and service levels that exceed the expectations of customers. Second is focusing our credit worthy sectors of the commercial and small business markets, a wide array of products designed to manage their cash flows and help their companies grow. Third is providing appropriately-priced mortgages in select markets through a network of local brokers who meet our standards in the areas of customer education, attention to detail, and longevity. We also provide mortgages through our branch network which has become an even more important channel as consumers change their buying powers -- patterns.

Fourth is providing alternate products that create non-interest income such as investment and insurance sales. Fifth, providing the very best in service levels from our staff behind the scenes. This would be our IT operations, loan servicing and processing, underwriting and all of the areas that make up our service and operations departments. Finally, improving those processes and managing, in particular, our expenses in all areas of our company, including managing our cost of funds.

This is is what we do every day. It bears repeating what we don't do. We don't engage in sub-prime lending. We don't piggyback mortgages. We don't originate 100% financed residential properties. And we will not loosen credit standards to increase production numbers. With all that being said, let's talk about our results.

For the fiscal year, BankUnited achieved net income of 81.4 million, compared to 83.9 million for the fiscal year ended September 30, 2006. Diluted earnings per share for the fiscal year were 2.14, compared to 2.30 for the 2006 fiscal year. Excluding a 5 million pre-tax charge of $0.09 per diluted share for other than temporary impairments on various investment securities, earnings were 9.7 million, or $0.26 per diluted share for the quarter. Total assets grew to 15 billion for the fiscal year. An 11% increase from the prior fiscal year and total deposits were [7.1 billion]. Net interest margin, an area that has received considerable focus by our company, reached 230 at the end the quarter compared to 226 for the same quarter last year, while core business margin did increase slightly, it was offset by the carrying costs of nonperforming assets.

Total loan originations for the year were 4.6 billion, down 32% for the 2006 fiscal year. The slowing housing market and our diligence in credit standards are reflected in a 45% drop in residential mortgage originations during the quarter. During the fourth quarter, residential mortgage originations were 818 million. BankUnited was built on conservative credit guidelines. This history gives us confidence in the integrity of our mortgage loan portfolio. Yes, the number of [nonperforming] assets have increased, just like we have indicated in the past. Two years ago when we were just at 4 basis points, we said that the level was unsustainable. At the end of the fiscal year, nonperforming assets were 1.39%. We believe the real marker is our net charge-offs. For the quarter, net charge-offs were 2.9 million related to the residential portfolio, which includes 1.2 million in estimated mortgage insurance recoveries. Net annualized charge-offs as a percentage of total loans was 0.08%.

In our October 3 pre-release, we reported a loan loss provision of 8 to 10 million. We raised that provision to 19.1 million based on a number of factors. These include the potential for further difficulties in geographic markets that are being impacted by builders price decreases, and a general weakening of real estate markets. The unpredictable nature of the overall economy contributed also to our decision to be especially prudent.

There is no doubt that we are in the midst of a real estate cycle. In BankUnited's 23-year history, we have been through a few of these cycles. In my 40 years in banking, and Ramiro's almost 40 years in banking, we have also been through a number of these cycles. The keys to working through them are remaining focused on strategy, directing experienced resources toward loss mitigation, and ensuring that the entire organization learns from the experience. After the inevitable rebound, it will definitely happen again in the future, and the lessons we learned from this climate will help us prepare and work through the next one.

We talked about this last quarter but it is important to reiterate that BankUnited is a bank, a diversified full-service bank. Today, we have 86 branches in 13 coastal counties in Florida. We have more than 7 billion in deposits, and offer our customers full service commercial and small business banking, online banking and residential lending.

I will now turn the call over to our President and Chief Operating Officer Ramiro Ortiz, who will provide more details on our day to day strategy and results.

Thank you, Fred. Fiscal '07 was a year of continued strong growth for BankUnited. Micro market strategies continue to play an important role in our growth. Our neighborhood banking group expanded with 10 new branches and entered the new markets of Indian River and Pinellas counties. The balance of the new branches then filled existing markets. We ended the fiscal year with 85 locations in 13 counties. This year, we will slow our expansion, plan for moderate growth, and devote an internal focus on infrastructure and other needs to smooth out our operations, gaining efficiencies and expense control, in all of our sales, servicing, and bank operations areas, are goals for '08.

We continue to show steady deposit and loan growth during the quarter and fiscal year. Total deposits for the year increased 17% to $7 billion. Core deposits, a $5.1 billion, represents a 16% over the previous year. FDIC recently released numbers, show BankUnited as one of the very few top 10 banks that gained deposit market share in the state. As a matter of fact, in all of the Florida markets, we serve, and I repeat, all, we have gained market share for the third consecutive year. There isn't a bank that can say that. These numbers highlight the success of our bankers at the local branch level, and the success of our neighborhood banking strategies.

In addition, fee income, which excludes loan servicing fees, increased 21% year-over-year. Commercial and commercial real estate balances grew to $1.2 billion, and it is a 4% increase over September 30th, 2006. As we become more entrenched in our newer markets, we have strategically added lenders, small business bankers, and investment professionals to meet the needs of our customers and expand the reach of these business lines.

Total loan originations during the fourth quarter were $1 billion. That's a 39.7% decrease from the same quarter last year. For the fiscal year, total loan originations were $4.6 billion, and that's down 32.2% from the '06 fiscal year. After loan sales and repayments, the total loan portfolio was 12.6 billion, compared to 12.3 billion at June 30, 2007, and 11.4 billion at September 30, 2006.

2007 was a challenging year. And we expect a difficult economic climate to continue for the next few quarters. Our commercial, commercial real estate, and wholesale lending areas have stable pipelines, and our neighborhood banking group continues to gain traction in the local markets we serve. In addition, we're expanding our wealth management lines of business with more focused initiatives that will add to our success in the upcoming year.

Now, for more details about our financial results, I will turn the call over to our Chief Financial Officer, Bert Lopez.

Thank you, Ramiro. This morning we reported net income for the fourth quarter of 6.4 million or $0.17 per diluted share. In our pre-release earlier this month we guided to $0.41 to $0.46 per diluted share, the higher provision of 19.1 million compared to our previous estimate of 10 million, added an additional $0.16 per share impact. We also had a $0.09 per share other than temporary impairment of investment securities impact. These were securities which were two mutual funds and a preferred stock at AGSE.

On this call, we're going it give some vintage information as a percentage of total loans on a residential loan portfolio, including our consumer specialty mortgages which are also first mortgages on residential properties. In terms of the years, our 2003 vintage and earlier is only 11%, 2004 is 12%, 2005 is 22%, our 2006 residential portfolio is only 36% of total loans, and our 2007 is now 19% of total loans. Again, these numbers are as a percentage of total loans. I should also mention that in terms of mortgage insurance, our 2006 portfolio is covered by 30% mortgage insurance, or 30% of the loans have mortgage insurance, and for 2007, that number is 25% of all loans.

Negative amortization in the fourth quarter was relatively flat at $48 million, compared to 46.4 million in the third quarter, and 46 million in our second quarter and now totals 3.55% of our option ARM balances. We expect these percentages to decrease as we continue to focus on our new product, such as the 5-1 select which has a lower amount of negative amortization, which can be attributed to it. As a reminder, these products are expected to generate lower levels of negative amortization.

Our nonperforming assets increased to 209 million in the fourth quarter, from 125 million in the third quarter. As a percentage of total assistants nonperforming assets were 1.39%, 86 basis points at June, and 16 basis points at September 30, 2006. The increase in NPA was primarily associated with our residential loan portfolio. Residential net charge-offs in the fourth quarter were 2.9million. Net of 1.2 million in estimated recoveries from mortgage insurance. Consumer loan net charge-offs in the fourth quarter were 619,000 and commercial portfolio and net charge-offs were 2.1 million. Total net charge-offs for the quarter ended September 30, 2007, were 5.6 million. Net of the estimated insurance recoveries of 1.2 million. Compared to a net recoveries of 571,000 for the quarter ended September 30, 2006.

The aforementioned 2.1 million net charge-offs for the commercial portfolio includes the last remaining portion of a previously disclosed $3.0 million commercial real estate senior mezzanine loan. As we discussed in our pre-release earlier this month, during the fourth quarter the Company converted the senior mezzanine loan to subordinate a debt of it's parent company which resulted in a net charge of $1.8 million for the quarter.

For the year, net charge-offs related to the residential portfolio were $4 million, net of the 1.2 million in estimated recoveries, total net charge-offs for fiscal 2007 were 9.3 million, net of estimated insurance recoveries. This represents only 3 basis points on residential and 8 basis points on total charge-offs to annual loans respectively. Even with this low level of charge-offs, and given recent market difficulties, we have further refined our reserve for loan loss methodology. We placed a larger reserve on a combination of 2006 vintage loans and locations where there are demonstrated home price weaknesses, or decreases. As well as a more refined measurement of the inherent losses in our portfolio.

Accordingly, we increased our provision for loan losses to 19.1 million in the fourth quarter, compared to 4.6 million in the 2006 fourth quarter. That resulted in an increase of allowance for loan loss of up to 58.6 million, at September 30th, compared to 36.4 million at September 30th, last year. The allowance for loan losses as a percentage of total loans was 46 basis points, this past September, compared to 32 basis points in September of last year.

As far as some color regarding delinquencies, when you talk to our collectors there are generally three reasons for borrowers being financially strained. Obviously we have the change in life situations, debt, divorce and loss of job. In Florida we have seen significant increases in annual property insurance premiums and property taxes. Property insurance premiums in many cases have doubled or even tripled in 2007. With Florida state legislature is currently meeting to address property tax reform. Additionally, we're seeing cases where the primary reason for borrowers being unable to meet their payments is that they have been overextended and that has created the financial strain.

At September 30, 2007, BankUnited had 541 loans in foreclosure, which represents only 1.5% of the Company's 35,000 residential loans. Based on recent appraisals, the current weighted average loan to value of the loans in foreclosure as of September 30th was approximately 86%, including the effects of mortgage insurance. This is up from 79% at June 30th.

Our [REO] balances, or REO number of units has started at 27 units at the beginning of this quarter, we added 70 new units during the quarter and we had sales of four units and the remaining balance ended at 93 units as of September 30th. This month to date in October we've already have 17 properties either sold or under contract. Our capital ratios continue to remain strong and are in excess of regulatory requirements. Our core and risk based capital ratios were 7.8% and 15.4% respectively at September 30, 2007. Our tangible equity to tangible assets ratio at September 30 was 5.16%, and during fiscal 2007, the Company raised $184 million through the sale of 3.7 million, 6.75% HiMEDS equity units which manditorally convert to common equity in May of 2010 at a maximum price of $32.76.

During the quarter we have purchased 315,000 shares of our class A common stock. For fiscal 2007, we purchased over 1.7 million shares of our class A common stock. Book value per common share was $22.71 at September 30th, up from $20.34 at September 30, 2006. Our tangible book value was $21.90 per share at September 30th. Our margin, as Fred mentioned, it was 230 basis points at September 30th versus 240 basis points last quarter. The recent rate decrease will help improve our core margin as our liabilities can reprice quickly.

While this is obviously a positive, the carrying charges and lost income of our nonperforming assets have offset this increase slightly. The total impact through the margin was 17 basis points for the quarter. Net non-interest income was 2.6 million, which includes a $5 million pre-tax, $3.3 million after-tax, other than temporary impairment which we had announced in our prerelease. Our expenses increased 3.7 million for the fourth quarter of '07 to 54.2 million, up 7% from our 50.5 million in the third quarter fiscal '07 and up 28% from fiscal -- or the last quarter of fiscal 2006. non-interest expense increased 50.9 million for 2007, up 34% from our 2006 figures.

And with, that I would like to turn the call back over to Fred.

Thanks, Bert. The results of the past year are solid. We know that 2008 is going to be a challenging year. But we are confident in our ability to control expenses, serve our bank customers, and weather the storm. Although the deterioration of the mortgage markets were steeper and faster than anyone in the industry anticipated, we believe we have a clear understanding of our portfolio. Many of the business decisions we have made in the previous three years, especially relating to underwriting standards, kept losses at a manageable level. Local market consolidation continues to give us opportunities to build customer relationships and serve our markets. Expense control and process efficiency will be important in the upcoming year.

We're now ready to open the call to questions. Moderator, if you could please proceed.

We are now ready to begin the question-and-answer session. Please limit yourselves to one question and one follow-up. (OPERATOR INSTRUCTIONS) Our first question comes from Jennifer Thompson with Oppenheimer.

Hi, good afternoon, everyone.

Hi, Jennifer.

First of all, can you give us some color on some of the earlier buckets of past-dues, trends in terms of 30-day past-dues this quarter versus last quarter?

We haven't generally submitted that as a point of information. I can just generally indicate that we anticipate that increases in MPA's will stay at a somewhat higher level for a while, and we just don't have an exact prediction time for that.

I guess I'm just trying to get at -- can you give us color on, is there a sense this quarter that those early buckets are accelerating, the pace in nonperformers, this quarter --

I think as a generality, I would not say it is accelerating over the last month or two, particularly, but, what has happened is that we have developed and have a strong collections team, and we're continuing to improve our systems in that area and we're learning a lot in the process. So it is important for us, ultimately, to address the earliest of the payment,s because the earliest payment periods ultimately, as you're probably asking that question, do have some indication of the future, but at this point, Jennifer, I can't say it is that -- in a position of predictable or in any particular trend, so I hesitate to do so, other than to say that I think the level of MPA's will have some continuing rise, given the overall situation around 2006 loans. The primary loans that are going into foreclosure right now have really moved over to the 2006 portfolio, and the 2005 is essentially fading, as a factor compared to that.

So I think the question for everybody in the industry, and there are two basic things, one is, is that an early period situation, where those problems in the 2006 are coming in earlier for everybody. It appears to be that way. And does that mean it will last longer? Or will it really have happened very quickly and it is going to be a short period thing of a couple of quarters? Obviously, none of us know that. What I do know is that when compared to other entities who are mortgage originators like ourselves, our delinquency levels, our MPA's are behind them by a quarter or more, in their level. The number of other entities, that you all as analysts are well familiar with, are reporting much higher numbers than we've reported for the same quarter. And in fact, some of them who have for sale categories haven't necessarily included those in there. So we seem to be well behind those, but recognize that ours are still growing. I believe theirs are probably also still growing.

Just to reiterate, different from a lot of these others, we did not do piggybacks, we didn't do sub prime, we originated fully indexed rate, and we applied reasonable tests to our stated income situation. So to us, that makes this ultimately a lot different, and I think also our ultimate LTV situation appears to be a lot different as well. Which, at the moment, as we've addressed these, and we have come through with our REO's and also the appraisals have been pretty hard hitting appraisals on when a loan goes into NPA, it would appear that we still would only anticipate moderate losses from the degree of MPAs we have.

And the last thing I should say, because Bert mentioned how many REOs that we have, the truth is that we are starting to proceed only on the sales, and the sales figures he gave you, are actually picking up quite a bit, so I think we're starting to do a very good job in that area, because only half approximately of our REOs as they come in, are initially available to be marketed, because of different state laws on redemption, or the need to evict people who are still staying in residents once you finish the foreclosures. So the number he gave you is actually only about 45 or 50 properties thus far that have been markable. So we have been through these kind of things before and I think we know what we need to do to move these properties quickly through the process, into our hands, and then ultimately out the door. So that process will start picking up to our benefit, as we go through this process.

Okay. And also, a follow-up question related to the provision unit, you really ramped that up this quarter. Is that the trend we should expect to continue? Do you consider it more of a one-time bit of a catch-up? How should we think about that?

I wouldn't call it a catch-up. I would call it an attempt to look forward. And so to some degree, it has some predictability of future MPAs, but there is is no question that if MPA's continue at a high level, then it could be very well that a reserve of this nature or larger would be taken into account ultimately at a later date. But right now, we have included in our numbers a look forward on certain delinquency levels combined with, as Bert specifically talked about, and I thought this was important for us this quarter, is to do a little more digging into and take more reserves specifically directed toward geographic areas. And those areas, we felt, had experienced more home price depreciation for a number of variety of reasons, but amongst those more recently, and I think I felt more necessary to look at some of this, is that in some of those markets, you had some of the national home builders running sales, and we felt that that was going to continue some depression of home prices in those areas, and we should go ahead and reflect it in our numbers.

Mostly in Florida, are these markets mostly in Florida that you're talking about?

Some of them are in Florida. Bert can actually go through the list. But I mentioned all along, and I noticed a number of MI companies are now mentioning, that I considered Orlando to be a problem area. We have some loans in the Sarasota area and some of the West Coast communities, the Naples through Ft. Myers area. That is Florida, and we don't have really many loans up in the north area, above Palm Beach County. That was fortunate because there was a lot of heavy home development in that area that is really suffering quite a bit. But, we did reserves for our Phoenix area -- areas, we just basically took Arizona and did Arizona, because we know there are some project areas out in the -- those markets, that will have some effect on loans, and we definitely just took California, and we added some more reserves for California. We felt that was also appropriate. So, we have looked around the country. We've had a few losses, actually, out of Michigan, but we have very few loans in Michigan, so we didn't feel it required anything additional. And that basically is the story at this point. Bert, you may have more to add.

No, Jenn, just to add to Fred's points we did certainly look at it by location. We also took a look at it by vintage. We thought the 2006 vintage, as has been well published, is probably the area of more concern. So we did a combination of 2006 vintage and the location. So those two stress points is what we looked at and that's where we applied some of the higher level of reserves. And obviously we're talking solely about the residential areas.

Great. Thanks very much.

Your next question comes from John Pandtle with Raymond James.

Okay. Thank you. Good afternoon. The first question relates to the $19 million provision, the change, or the increase from your pre-release. Did that revised provision reflect any input from your accountants or the regulators?

We always make our ultimate determinations as to what our reserves should be. And I have never really -- I don't think I've ever in my life ever heard from my regulator about anything I ever did in this area, and I think that is kind of an odd thing. Maybe other people do. I don't. But as far as our concern, we followed a methodology that we thought was appropriate. And I think what has happened in the world today is that when you're addressing GAAP, you're addressing GAAP not just on what is the actual rule of GAAP relating to current actual NPA as of September 30th, but we took into account our delinquencies and the levels they were at. And so we made some application with respect to understanding what that was, and then we built upon that.

I felt that, and I think the final tipping point, John, really related, and I know you probably have seen, there have been some, you probably -- because you're on the West Coast you probably have seen more of this, we don't have much on the East Coast, except, I guess, maybe Palm Beach, but on the West Coast of Florida, I know a number of the national home builders ran what they refer to as year-end sales or the like, and they definitely have done that in Arizona, they've done that out in California. And I just felt that given that, and some of the announcements, some of the other lenders, I mean let's face it, a lot of the lenders who have much higher NPA situations than ourselves, have gone beyond their current situation, and they have just simply taken very large reserves, and I felt we needed to address this, but address it in a more rational fashion. And as I said the final tipping point were those national home builders sales, I just felt that that meant that certain areas, until we get through it, will keep a depreciated price situation with respect to homes, and so I thought we should reflect that. And that is really what occurred.

Hey, John, this is Bert, if I can add just a little bit to that. When we preannounced the 8 to 10, we were comfortable with that level knowing that we would continue to refine the methodology, and as I mentioned earlier, that's exactly what we did. We saw some continued deterioration in home prices in locations in the '06 vintages, as I mentioned. But what we're trying to do with this is project out into the future what we expect to see in delinquencies and NPA's for those loans that are in our portfolio right now which is what GAAP requires us to do. So we took a look at this, and there is obviously a good bit of judgment here, but we took a look at this and what we expected to see, we're trying to get ahead of what we're seeing coming in, in NPA's. So that's why we adjusted our reserve up in addition to what we did for '06 and for the locations.

Now, as Fred mentioned earlier, the reserve computation methodology is designed so that if we continue to see a rise in NPA's you should expect to see an elevated level of provisions going forward, for at least the next couple quarters as those NPA's materialize. But we can't lose sight of the fact that compare us to peers, compare us to others in the industry, we have very low rates of charge-offs. We have pretty strong MI coverage, as I mentioned earlier. The '06 vintage has 30% of the loans have MI coverage on them. We have not seen a lot in the way of charge-offs. We've always said we're going to see delinquencies and NPA's but we've been able with the underwriting that we've done in the past keep the charge-offs relatively manage able.

So the combination of all of that, the refinement of the allowance for loan loss methodology is what occurred between prerelease and now. And again, the goal is to get out ahead of NPA's that we think will materialize and for those inherent losses that are in the portfolio, we want to recognize them.

And the other thing, John, is in the past, I would say that I certainly have heard from some of you all that we should try to lift our reserve, and frankly, we were never allowed to. It sort of the opposite. We have never been allowed to by our accountants, and we've said in this in the past. And given the market situation right now, and all of the announcements that occurred since even we did that preannouncement, that dramatically changed what occurred in the market, and allowed us to increase our provision past our actual present write-off situation.

Okay. And then as a quick follow-up, I guess, for Bert. Bert, when have you these loans go nonaccrual, do you also, from an accounting standpoint, do you reverse the neg-am on those loans?

No, the cap requires to reverse the accrued interest, and maybe that's where the confusion occurs. A neg-am loan will behave the same as at regular loan when it comes to the accruing of the interest from the payment due date and then through the missed payments. So we do not put negative amortization on the interest that has been accrued until a payment is made, or if it goes in that direction, until we it put it on NPA. So, we're not creating neg-am, we're not reversing it, what we're doing is creating accrued interest just the same way you do with a regular loan, and yet, by the time it goes on nonaccrual, we reverse that interest income, or that interest against our interest income amount.

Okay.

But you know, John, and I think I know in a sense what you're trying to get at, but given that the primary areas here right now relate to 2006 loans coming in, there isn't a great deal of neg-am in those at this stage, compared with the fact that you're also reversing interest, so it's a factor, but it is not a particularly significant factor.

Okay. Great. Thanks for taking the questions.

Your next question comes from Gary Gordon with Portales Partners.

Hi, thanks. Two basic things. One is if we can get an update of the construction book, and maybe in particular, has the rate of paydowns of the loans changed much? And what sort of watch list, if any, do you have on the portfolio?

We have $150 million in outstanding, and that is our total construction loans. We monitor that portfolio on a monthly basis. So far, that's behaving and behaving the way we would expect, and we're not seeing any problems with that. We also have $103 million in raw land, and again, we've got that performing as expected.

Gary, just for some color, this is Bert, the 152 million balance now is down from 174 million at this time last year. So it is a decreasing balance.

Okay. Thanks. And two questions about capital. Obviously you did buy back stock during the quarter. But, obviously, the world has changed a reasonable amount over the past quarter. Does it make more sense at this stage to retain capital than to buy back?

We've determined, given the circumstances, I think we somewhat announced that before that we're not looking to buy back stock right now. There may be occasions in the future when we might, and so it is not necessarily off the table, but as this cycle develops, and as we see what the levels are relating to MPAs, we feel it is prudent not to do so presently. And also, I mean let's face it. It isn't that long ago that we had one of the more financial breakdowns that you could possibly see, just a short time ago. So we feel it is important that we maintain a good capital position. We've done that at a high level. And that we also combine that with a high liquidity position. We expect to continue to maintain both. Until such time as we see a much more calming market situation. And I would hope that sometime, if not in this quarter, certainly next quarter, that we will get to that position. And then there are considerations at that point that all of us could review those particular concepts.

But for now, we can only control what we do as a business. We certainly feel that for ourselves, we're greatly undervalued. I certainly would love to be out there buying our stock at this price. But nevertheless, we have to do what is prudent in terms of what we've always considered, which is protecting the tree. So we're going to keep the tree real healthy.

Okay. Thank you. One detail point, you mentioned on the HiMEDS, the maximum price, my assumption is that the minimum for conversion price is at 23.40. Is that correct?

That's correct, yes.

Okay. Thanks. And one final thing, three, four months ago it seemed pretty obvious that as your option ARMs got out of their prepayment penalty period we see fairly rapid pay downs as we have with other parts of that loan. Again because of the changes in the world over the last few months, does that outlook materially change? Is your assumption now that we would see --

We don't anticipate a great deal of paydowns presently and that really gets back to the mortgage market as a whole. Some of these people who ultimately probably will get into some type of Fannie Mae, Freddie Mac on paydowns. But essentially because of what happened in the heavy jerking around of the markets on a financial basis, the cost of mortgages that are outside the Fannie Mae/Freddie Mac arena are certainly much higher at this point. And until you see a much more competitive situation in that market, I would not expect to see pre-pays, particularly pick up. The products are out there.

There are different entities that are heavily into the mortgage market with -- we mentioned this in earlier time, for some people, but, certainly some of the biggest lenders are heavily advertising their products. But we have -- we think there is still a disconnect out in the market relating to mortgage products and the ability of people to go and get the mortgage products, and that's going to last for a while. Which is another reason for why you've had some pickup on the NPA side, and delinquencies for a lot of people. There's the inability for people as they used to, to go out and refi. There is quite a disconnect in the market.

Gary, just for some color on numbers we continue to have very low CPRs. Most folks are in their 20s. We have historically been in the mid to high teens. This past quarter, our CPR in the residential portfolio is only 12.4%. So again, just emphasize the point, CPRs are down and prepayments are down.

Okay good. One final quick one. When you get MI insurance, you insure down to 80% or do you go farther than that?

We insure down well below that amount.

Okay. Thank you.

Your next question comes from Jefferson Harralson with KBW.

Thank you. I wanted to ask you guys about loan modifications. Are you guys becoming more active in modifying loans? Can you quantify how many you modified in the fiscal fourth quarter?

I don't have a great quantification of that right now. We are starting to do more modifications, but that has been a modest number. I think the emphasis of our collection, the whole process is getting in touch with people, and, what I think I found out, that really I think is different from this period is that more than in some periods, people have been frightened, and they don't call you as readily, and get in touch with you as readily. So our emphasis has been to pick up the contact points and we're doing a lot of things to improve that. And expect over this next month to start getting a much higher contact level. So as that -- those contact levels grow, we will have better opportunities to modify for people.

I know there have been some conferences that the government has run, and one of the things I think that really came out from it was that a lot of people are difficult to get a hold of. It sounds crazy. But they -- it is not because either refer to them as the dead beats or something, it is not that at all, it is that this whole situation has created a grouping of people who are afraid to talk about their problems. And all of us in this industry have to reverse that situation. And I think we're all working on it, and there probably are some that are more ahead of this than not, but that all gets back to relates to the fact that our delinquencies have picked up later than other people's delinquencies and that our NPA's are much behind other people's NPA's. So we're getting all of the experience, putting it together, and we expect to greatly improve upon our contacts with our customers. We think a lot of them are savable in terms of doing modifications. But at this point, modifications are not a big piece of what has happened.

And how about the recapping schedule. Do you look out to 2008 and how much do you expect how many loans (inaudible) expect to recast in 2008 and 2009?

Well, there is certainly more in 2009. But there is not very much coming up in 2008. It is a modest amount. And they really relate to the ultra part of the portfolio. So it has not, at this point, been really a significant figure. I think Bert pretty well told you what the situation is. It is not so much what anybody's payment is. It can be anything. Whatever their payment is, what the situation of the day's market, for the people who are having trouble is, just whatever their payment was, they then went and got overstretched. And no one expected house prices to come down, and so they would -- if they could take out a loan with us along with somebody else, and then they go and decide to spend the money whatever way they could on other stuff. And suddenly, they've got too much indebtedness, and they need help, and that's essentially what is really happening.

I personally think the so-called recasting is somewhat overdone, as an ultimate problem because many of the people, many of the other entities who are having more of the recasting are going to modify those loans anyway. I don't think that's what the real problem is.

And then lastly, the LTV on the fresh appraisals, you mentioned it went from 79% to 86. At what level, I guess what accounts for that increase, I suppose, is just a lot more sharp appraisals, but at what level does that start worrying you about the collectibility of your loans?

Number one is, we ask for very tough appraisals, when we ask them to go and value these. And number two, is these are the 2006 loans coming through, and basically what you're going to see is that kind of leveling on the 2006 loans, because clearly, I think everybody recognizes that sometime in the middle of 2006 is is when you had the highest price levels. So the degree of the softness varies from market to market, and there are a number of our markets that have held up in values very well, and there are areas where you have people who hold on to pricing and you may have lower sales levels, but the properties don't move at the general heavy discounts that you have in other markets. Clearly, to me, where there is new home building that was done on a large scale, by national builders, those are the markets that will have some further continued softness and that's why we started feeling we should start reserve for those particular areas, because that will hold down those prices longer.

As far as Florida is concerned, I think it is a tremendous misconception about Florida, what is different about Florida is that Florida keeps growing, and Florida keeps having people move to it. Florida has numerous people who are interested in being involved and trusting here. And they see this as opportunities. So I have always expressed that my biggest concerns really are out to some degree in the midwest. And the project home areas. The project home areas will ultimately recover, because a number of those are in the states that are growing the fastest, but particularly those areas in Florida are unemployment, there is a much better in Florida, than the rest of the country, and we've constantly added on jobs during the last 12 months, it has been substantial job increases, and we've been that way since 2002, and frankly, the projections all indicate continued growth here, so you ultimately will have an absorption of this, and we're going to get through this period, but there will be an absorption.

And with the dollar where it is, versus the European currency, and with the very strong Latin American economies, I think a lot of people don't understand how strong those economies are, and how much those people invest in Florida, we think that this is a cycle as far as Florida is concerned that may end up being over a lot faster than some people believe. And I think some of those -- there are people who are out there trying to spread all sorts of things about Florida, and I think they're misreading this. My family has been here dating back a long, long time, and we've been through many, many, many cycles. And the demand for people to come into Florida is still substantial.

And the 86%, isn't that getting close to that threshold where you should start to worry about collectibility of the loans going into foreclosure?

When you say the 86%, we have a concept of how much our costs are that you would add on top of that, and in essence, the balance is where you would have the possible losses. Obviously, the items that go into foreclosure are the ones that are the most probable in having some kind of loss. The greatest percentage losses you normally have when you do the appraisals would be clearly those loans that are over 80% and were insured. So the insurance then brings that back down, so the reality is that those are the ones that are most likely to have losses. And those are the ones that aren't insured.

All right. Thanks.

Your next question comes from Matthew Kelly with Sterne, Agee.

Yes, guy, I think a lot of this discussion really gets back to reserve coverage and expectations of charge-offs. I mean, the commentary that you're not allowed to increase reserves because of pressures from your accountants doesn't really make sense with all that has changed over the last couple of weeks and quarters here. I mean we look at Downey Financial, took a one-time provision, increased reserves from 55 to 120 basis points. Their MPAs were up 42% in the quarter. Yours have been up over 60% for three quarters in a row now. I mean, the market is extremely concerned with the low level of reserves, and something has to change there, in our view, because you are just not stacking up versus the other option ARM players, which has really taking action to increase reserve levels. And so I think, Fred, a lot of it gets back to where you really think charge-offs are going to come in over the next couple of quarters and justifying the statement that the action so far has been acceptable and prudent and justified.

Well, I think that Downey also announced, after a pre-release, but what we try to do is project somewhat ahead as to where we're going into this quarter, and we agree that, to some degree, the accountants aren't doing the same thing they did to us in every other quarter, which is hold down what we could do. So we did take a going forward, I think Bert said that, a going forward figure. That does not mean that we will not have to take a reserve this large or maybe possibly larger for this next quarter if we feel we even need to be more in a sense ahead of the game. And -- but thus far, and I think it is a little difficult, some of the bigger entities have large amounts of REO, much larger amounts of foreclosures, and they have been able to see, and they've already written off pieces, some of them have written off major pieces of their portfolio, and we have not been in that position and we still aren't in that position right now.

So what we see right now indicates that we would have moderate losses, moderate charge-offs, and therefore, this is a more than appropriate reserve. But we're going to have to gauge that by increasing MPAs, and as they go into NPA, we are going to have to keep doing those appraisals, making them tough appraisals and come out and keep estimating what we think those losses are, and we're going to try to be ahead of the game. So right now, for what we know, we're in a sense, ahead of the game, but we do know more NPA's are coming in.

Matt, and you, and you may have --

Let me finish one more thing, Ramiro and then you can cut in. And this clearly is 2006 we're talking about. That is the part of the portfolio. We've got 30-something percent of our portfolio is 2006. And most of what comes in the door right now is 2006 and the other periods are basically fading off, as being part of the question. So we tried to take into account that it was 2006, we have taken into account some of the geographic areas, and it says that, in our mind, we are projecting forward. And we are covering a certain delinquency level forward. But we are also saying that if the levels keep up, that we may very well take a reserve this large or possibly larger come next quarter. To be ahead again.

Why not just take --

Matthew, I just wanted to clarify, because you may have misunderstood, when Fred said that the accountants had restricted us, that was in the past.

And Matthew, I'm just going to repeat what I just mentioned earlier. We are doing everything we can to try to find the inherent losses in the portfolio. And that involves looking forward. And making some assumptions. And again, we're going to manage through this, because we're looking at it in the format of where the reserves should be, where the '06 numbers are popping up, where the locations are, and we will do fine managing with this. And that's why we're saying, if MPAs continue to increase, should we see losses increase likewise, we will continue to add provisions as warranted but we will manage through this.

But there is not going to be any kind of one-time large provision to bring you more in line with some of the other peers such as Downey, Fed, WaMu, et cetera?

Well, I can't say that. Because I have to see what happens. But we've been lagging behind their problems. Now, I don't know if I'm going to catch up to their problem, or continue to lag behind, but my belief is given the numbers that are coming in with, and given the probability of what is happening to them, that they have a much larger -- and I shouldn't be commenting on other companies, but people out there generally, to me, at this stage have a much larger problem than we have. I can't guarantee that our problem isn't going to get large also. But I -- my comfort isn't just simply doing something with some major [ I did a] reserve and we all walk off and say we're happy. I'm trying to relate it to what is happening. And I haven't been in their position at this point. It's possible that we'll ultimately will be in their position, or we will feel necessary to do what they did. But we aren't there. And part of it is because our NPA's have substantially lagged behind some of the people you're talking about. And I believe, I would like, certainly, to believe, I think we have some foundation to believe, it's because our underwriting was different, and our LTVs were different. And, yes, and the way we made the loans were different. Most of these guys made loans based upon people's -- based upon their start rates.

Where do you think --

Based upon their start rates. They made loans with piggybacks. They made loans with sub prime. I mean they've got a lot to take care of. There is somebody out there other than Countrywide who holds all of the second mortgages. Who holds all of those second mortgages? I don't. Okay? So I mean there is a lot of that there. We aren't there.

What is the current thinking on where charge-offs are going to play out over the next 12 months with what you know right now? Because, there has been a discussion about charge-offs in prior calls 15, 20, 25 basis points is what I recall, I mean what is the thinking today, as you look at what you're experiencing on losses vary on each of those loans that are going through the foreclosure process and what could be coming?

The only way I can describe it to you is while we expect charge-offs to go up, they continue at this point compared to the MPAs to be moderate. And that appears still to be the case.

Okay. Could you maybe provide a breakdown of the $209 million in MPAs by vintage and location? Just get a little more data?

Vintage, you're talking about the 2006 --

Just the total 180 in nonaccrual loans.

We can give you some color on that. We focus on the 2008, as we mentioned, and they're elevated above their --

2006.

2006, I'm sorry. They're elevated compared to the portfolio. They're about 36% of the portfolio to about 50% of the MPAs coming in, ergo the idea that we're going to focus the reserve on those as well as the locations. Locations themselves of the MPAs are actually pretty much in line with the portfolio. We've seen some weakness in California. We've seen some weak in Arizona. And again, this is the NPA portfolio. So again, that's why we went back in and put some additional reserves on those two areas. We will continue to refine the process. For instance, Fred mentioned earlier, we put loans in northern California as a whole, on elevated reserve levels, we're going to continue to define that and be specifically where we need to apply those reserves, and the quantify of the reserves. But again, it is an ongoing process that will (inaudible).

Okay. And just to clarify, I mean is there not going to be any more guidance on NPA levels or charge-offs? Just to be clear?

No, we're going to give general concepts of it, because at this point, I find it very difficult to per se predict something like that. Just for example, as I mentioned to you, the builders sale that just occurred, it seems to me that affects values in some of the areas where we have loans, so the number of loans we have in those areas actually is relatively modest compared to the overall portfolio. But these are the kind of things that I think we have to work through. And I would say the most important thing for us, frankly, is the economy, and we feel a lot more comfortable, as long as we don't go into any kind of real recession. Because people will basically stay employed, but basically will pay most of our mortgages, and for the people who can't afford, because maybe their taxes or insurance went up, we ought to be able to work out plans for those people.

So it is very, very difficult to predict. This is not a cycle, when I first did a prediction, way back, in January, that somebody said hey, you did this such and such thing, we, in about three months, went out of that prediction, because what happened was you started seeing that this was just not a typical cycle. And once Bear Stearns made their announcement and other things happened, and then you have a financial market that shut down, and then people can't get mortgages, in the normal course, they can't even get second home loans in the normal course, you made a whole different kind of cycle. So it is very difficult to predict.

The main thing that I've seen thus far is that our -- the losses that we've had, according to the appraisals that have been done, when that loan goes into foreclosure, or especially an NPA, when it goes to NPA, is that we have moderate losses, against that piece of the portfolio. And that is no a question of that, that the 2006 are higher, and of that, 2006, those that were initially over 80% loans, because they have MI coverage, have higher losses, but then they are also covered by MI insurance. And we have thus far not experienced any difficulty. We basically had a lot of, thus far, excellent cooperation from the MI companies. So that's where we are.

All right. Thank you.

Your next question comes from Dave Bishop with Stifel Nicolaus & Company.

Good afternoon, gentlemen.

Good afternoon, Dave.

A quick question, sort of getting back to Matt's comments there, maybe hitting what you said, in terms of people who own the home outright that they're going to fight like hell to stay in that house and pay off the mortgage, but trying to get a sense from you if you have any sort of statistics you can share, what the percentage is, sort of an investor, developer, or nonowner occupied residential mortgages as a percent of the portfolio and maybe by vintage? And is that where you're starting to see the real credit issues and higher losses on the event of default?

You mean nonowner occupied meaning investor --

Right.

I've got to tell you, oddly enough, and maybe it is because of the way we did our underwriting standards, thus far, nonowner occupied has not been the key thing. And the only area where it has had an effect is in the Orlando area, where we also have a certain amount of NRA loans. And that has been about it. And that doesn't mean it couldn't grow some. But [eventually] had a relatively favorable experience thus far. And again, we had tighter underwriting standards for those particular loans. So other than the few places that we had in Orlando, the NRA situation, that's the only where I've seen as a higher thing. As far as people fighting to stay in their homes, there are lots of counseling centers I guess these days to try to help people stay in their homes. But the truth is, in certain places, you are able to get the house relatively fast, and in those locations, you sometimes have people where you have to evict. There is a percentage of those.

So when I talked about the REOs, the 90-something REOs about half of them are not yet markable because we either have to evict or they may be in some of the, particularly the midwestern states where there were redemption rights, and you have to have the redemption period running through. So that's basically been it. I haven't heard of that many. This is a very different cycle, and I have had -- there are some people, yes, they try to hang on to the home as long as they, can they file a bankruptcy, et cetera, but, we have, in most cases we've had our loan counselors talk to people, our collections department people are pretty experienced, and we haven't had as much problem with that. We actually work out situations where people can stay in their house and they will go ahead and sell it for us. And that's worked very well.

Okay. Because I was looking at some of the regulatory data and it looks like Phoenix had a pretty high preponderance of nonowner occupied, so it doesn't sound like that market is deteriorating as fast as maybe somewhere like Orlando in that sense?

It is not so much as what Orlando is, but I think Orlando is a difficult market, because there is probably a little bit more transient type of employment in Orlando. And I think probably Phoenix has suffered that because there was a lot of building going on, national builders there, and you had a lot of people employed, and a lot of title companies, and everything around that, and all of a sudden, all of these projects are stopped out there, and they're selling off the houses, and somebody bought a $300,000 house and next door it is going for $200,000 right now. Fortunately, when we've gone through our numbers, and while we placed some additional reserves in this areas, Bert went through it, I think it is supposed to be the 10 worst zip codes for foreclosures, and actuality, we had a modest amount of loans in the total number of those areas.

Okay. Then maybe a question regarding the increase in other operating expenses. How much was that related to real estate workouts and how much was related to, I guess, the mention in the release, the fallout from some of the loans in process during the quarter due to [comp] and [late] funding comp from competition, and maybe walk through some of the mechanics there.

About half of that was related to the loan fallout. As we had talked about earlier, we had some pricing discrepancies, we had some loans that actually we had worked through the entire process of building the loans, and then at the closing table or shortly before there they went off to a competitor because of better pricing. Obviously we adjusted our pricing and mitigated that difference. But during the quarter in essence we had built a lot of loans that had went into the scrap heap because you don't get to take the FAS-91 -- or FAS-391 credit against those. So without the credit our expenses went up. Between that and some hedging costs in our conforming pipeline, we did have about half of the increase related to that.

We -- the remainder of the increase came from a few other areas, most notably some of our occupancy and equipment particularly in the depreciation and amortization of some new software that we had put in, as Ramiro said, many times, we continue to build the infrastructure of the Company. But all in all, those were the two biggest items that affected us. Going forward though, we've spent a great deal of time on streamlining the different processes we have in our various areas, building efficiencies, and we will continue to do that. We haven't seen all of the effects of those efficiencies this quarter, but we expect to see some of those going forward in the next couple of quarters. Reviewing everything we do to kind of take a fresh look and that should lead to some process streamlining and some better efficiency.

Great. Thank you.

Your next question comes from Gerard Cassidy with RBC Capital Markets.

Thank you. Good afternoon. Can you guys share with us, Fred, you had mentioned about your experience down in Florida, and have you been through these cycles before, what are the differences today for you folks versus the last real estate downturn? Which I guess you would have to target the early 1990s. And also what was the peak net charge-offs through the last down cycle that you guys saw? And how are you different today than you were back then?

Well, I think the only thing that you can really say about this cycle, that is obviously a very different situation, is you've had more of a depreciation in home prices. And clearly there has been in some areas a decline in home prices. And frankly, I've mentioned this before, to some people who have talked to me about this, but I think a very major situation occurred with respect to inventory buildup. And the inventory buildup happened, normally when you start entering into one of these cycles, the builders, the nationals, which represented at one time, by the way, a small -- if you go back to the 90s they represented a smaller percentage of the actual amount of homes being built. You had a lot more independent home builders who would stop on a dime and they would stop building when they couldn't sell their homes because they would be only out 5, maybe 8, 10 homes ahead of it on the construction loans.

The national builders working off-lines of credit and the like, they gain by efficiencies over a period of time, and they're building to buy large chunks of land, a much larger market share. And then they all had, and I talked to some of them, I had some of them, they all had the same light bulb when this slowdown started, and the light bulb was, if I just take some write-off on my land or use some of my lower cost land figures, I can continue building, I'll sell my home for X amount less and we will just keep going. The other guys will stop, I will keep going. Well, they all kept going and they all built a lot of extra houses. And that is, to me, the largest piece of our inventory build-up, is right there, they had a bigger market share. This is what they did.

And so when you look around, and you see a place like as somebody said, Phoenix, you see outside area of Phoenix and some of the areas in California where have you the big projects, when you look up in some of the Sarasota area, the areas up in Stewart and Saint Lucie County in Florida, and some of the areas over in Naples, Ft. Myers, they had lots of land, they built lots of houses and they kept building them, even though the demand had slackened off, and you've got big inventories and they have to be absorbed. The good thing about some of these areas is that all of these areas in the past have recovered.

All of these areas in the past, because of the growth to the states for a lot of reasons, Florida grows, for a lot of reason, California grows, and for a lot of reasons, Arizona grows, but particularly Florida, Florida has a unique -- an incredibly unique situation that Europeans love us, the Euro is extremely high, pounds extremely high, right now a lot of people don't understand the South American economies are doing extremely well, many of them, even Venezuela economies, we don't like the people there who run it, but they're doing extremely well, and these people are looking at places in Florida. And so we continue to believe, and everything projects that Florida will still have population growth, and of course, we have retirees, that's the old story, for everybody, and our job preface has been very strong. So eventually this will be taken up but the home builders definitely overbuilt. That's the difference. And it is going to take us a while to cycle through it. These sales they're doing may get that cycle moving faster again.

Gerard, this is Ramiro. Just to add something that Fred has started to say, and this is very important, and can't be lost. In the late '80s this was really a commercial slowdown as opposed to a residential slowdown. This is residential. And as you know, the absorption on the residential side is a lot, lot faster than the absorption in office space and commercial buildings and so forth. And I would say that's the main difference.

Okay.

Gerard. The numbers you had asked for, our charge-offs peaked at 68 basis points, but that is a misnomer because that was related to a charge-off we did with fraud, the fact that we covered 74 basis points the following quarter. More of an average has been about 7 basis points going back to the early '90s. Our peaks have been in the low to mid teens. And most, like those Ramiro had mentioned, is more related to commercial than it has been residential. We historically have not had much in the way of residential charge-offs at all. Obviously it's different this time. But historically we have not had much in that area whatsoever.

Back in that time period, did have you the presence in the other locations around the country, California, Arizona, et cetera?

Actually, most of the losses not on the commercial side, but on the residential side, we had back in that period, was in California. California, California went through a recession like this that now Florida, Arizona, and California and some other areas of the country are experiencing. California did this before, you can go back, you can look at it and you can see the mistakes that were made and you can see the pluses that occurred, and that tells you a lot about this cycle.

Would you agree that if we go into a recession, everyone's problems go a lot worse? Since, I agree with you, the last time it was a recession.

If the economy goes into a real recession, there're going to be more problems, and hopefully the fed takes cognizance of that and keeps moving to lower rates because I think they need to do another half or more to get this thing moving again. I believe they will ultimately do that, if not all at once, certainly in the next few quarters. But the economy itself has still been doing decently well, and the differential, I mean it like a global discussion, guys, you all got your economists, but our relationship to the pound, to the Euro, and to the Latin America right now, means that -- certainly in Florida we have a lot to be able to sell foreigners, not just what we do as retirees, and other people who move down here.

On your nonperforming assets that you announced, the total amount, are they all residential mortgages? Or are there any commercial loans, construction loans or land loans in there?

They are by far residential mortgages. There is a nonaccrual, there is only about $5 million or $6 million of other. And commercial real estate makes up the bulk of that. The vast, vast, vast majority is residential.

And finally, can you guys quantify for us, I know you have been adamant about the charge-off numbers remaining low, what is the cost for 10 million or NPA's or however you want to quantify it, but in terms of working these problems out, what does it cost you guys to work out a problem loan, again, on a per loan basis or for every 10 million the cost X?

We have a basis. We don't have a cost like that, we have a basic charge, and the rest of it runs through the balance sheet. The basic charge that we do is 8%.

8%?

Yes.

Anything you see between brokers commission, and some of the attorneys fees and additional closing costs, et cetera, we use an 8% automatic that we add in. We got to go to some more questions. We will do two more questions -- questioners. And I think that's it for this period. And then like always, we're available for people to call us. But if we can go, moderator, if we can do two more questioners.

Yes, sir. Your next question comes from Al Savastano with Fox-Pitt Kelton.

Good afternoon, guys, how are you?

Good afternoon, Al.

Three, hopefully, quick questions here. First on the appraised values for the loans that are in LTV, that were in -- I'm sorry, foreclosure, what was the change in appraisal values from the original appraisal?

They are all over the ballpark. At a few locations, they can be dramatically different. In others, there is only modest, probably overall, they can be somewhere -- I would say approximately averaging 10%. I don't have an exact figure. And, again, this really relates to having the 2006 ones come through. Because the 2006 loans, I think for everybody, there a few locations plus or minus a month, but basically 2006 loans are the primary problem, and the real question for everybody, that you can ask in terms of what is happening to other people, ultimately is, is this an accelerated happening, because of the bubbling effect of prices in 2006, or is it a more prolonged effect? And we don't have an answer to that one yet. That is obviously the old-fashioned $64,000 question.

There's some evidence that this is a -- because of the bubbling effect, that you will see an acceleration of those come through, and that this will not -- this will be a sort of narrowed bell curve, they'll come through, they'l hit hard, and because the people who are overstressed and they're overstretched and they're bailing out now.

Okay. Bert, just real quick, the vintages that you gave us is that total loans or residential, please?

Residential.

Thank you. And then the last question, is can you comment on how often you talk to the regulators and are they aware of exactly what is going on?

We never give awareness discussions with respect to our regulators. But I've been in this business a long time, and --

We have not had any issues with any regulators.

No.

Okay.

When you think about us, I think that would be very unusual.

You've been in contact with the regulators though? Just normal operating procedure?

In the normal course of business, we have normal examinations. And I want to reiterate that we have had zero issues with the regulators. And we haven't had any --

I have never heard of being asked that kind of question. And it is not appropriate. And they wouldn't even like us discussing it. But, I haven't -- there are no issues with our regulators.

Normal communications with our regulators.

Very good. Thank you.

Your final question comes from James Shanahan with Wachovia.

Terrific. Glad I was able to get through. Good afternoon, everyone. Just had one quick question, please. Do you have any thoughts on generally speaking on the portfolio quality risk to capital levels, et cetera, at the mortgage insurance companies, do you believe they could face downgrades? Its rating actions, or risk of ratings actions, for the mortgage companies, part of your risk management program or process?

Well, the only thing I will say that we've managed is we take an internal reserve, so when we say well this is the amount that we expect to get back for mortgage insurance recoveries, we take a percentage off of the actual amount that we're entitled to. Just in case there is any actions down the road, that it would make it more difficult to do the recoveries. So we're already doing that. But thus far, we've had no evidence of that. And in fact, I found extraordinary cooperation, and we think that they certainly have some anticipation of what is up, and they have seemed to go out of their way to be cooperative. In all situations. Because from their viewpoint, the faster they can resolve these, the faster they seem to be happy, and I'm only guessing that that relates to their reinsurance agreements. They seem to be prepared for this. Much more so than actually the last go-around. I've been surprised, to tell you the truth. I mean there are companies after hurricanes that it is damn hard to get your claim done. This has been the opposite. They really are encouraging the rapid disposition of properties because they feel that is the best thing to do that.

Just to add to that, Jim, we do monitor the companies. We use about six companies right now. The vast majority of our coverage is in the AA or better rated companies. But yes, we read the research that folks like you put out, we follow them, we look at their viability and we are monitoring them constantly, and that's what we do to make sure that we're well covered, because obviously that's what we're relying on.

Okay. Thank you for your generosity this afternoon with your time.

Thank you.

Okay. We appreciate everybody being on the call. And I know a lot of time has been emphasized on the credit situation. We think we have an excellent team addressing that. And we think we're going to get better and better and faster and faster at it. We just feel that we are a bank that has a good strategy. Our Florida franchise situation is sound. We are in a sound capital position. We feel very good about our customer retention and cross-sell and the continued improvement, which a lot of people overlook in the process of this credit situation. We will certainly be going forward to continue to streamline across the board, since we have a lot of consolidation due after rapid expansion over the last several years.

We appreciate all of you being online. If anybody has additional questions or information, we obviously are available to answer questions. And that's it. Thank you.

This concludes today's conference call. You may now disconnect.