Huntington Bancshares Inc (HBAN) 2003 Q2 法說會逐字稿

Good afternoon.

My name is Latangey and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Unizan Financial Corp.'s second quarter earnings results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press 'star' then the number 'one' on your telephone keypad.

If you would like to withdraw your question, press the 'pound' key.

Thank you.

Mr. Pennetti, you may begin your conference.

Thank you.

Good afternoon and welcome to our second quarter financial results conference call.

Hopefully, you have had an opportunity to review the press release we distributed at the opening of the market today.

Joining me this afternoon are Unizan Financial Corp.'s President and CEO, Roger Mann and Jim Nicholson, our Executive Vice President and Chief Operating Officer.

This conference call is being broadcast live over the Internet on our web site at www.unizan.com.

And additionally, the call is being recorded and will be available later today via our web cast replay on the Internet or via the telephone at 1-800-642-1687 for US participants or 760-645-9291 outside the United States.

The conference ID number is 1427680.

Unizan's second quarter 10-Q is scheduled to be filed on or about August 13.

Before we get started, I would like to remind that during the course of the call, we may make projections or other forward looking statements regarding future events for the financial performance outlook of Unizan.

We caution you that such statements are only predictions and that actual events and results may differ materially.

Reference is also made in Unizan Financial Corp.'s filings with the Securities and Exchange Commission, including its annual report on Form 10K for the year ended 12/31/2002 and other periodic filings.

And additionally, the corporation will file an 8-K of the transcript from this conference call.

Now, at this time, I'd like to turn the call over to Roger for some opening comments.

Roger?

Thank you Jim, and good afternoon everyone.

Thank you for participating on our call and your continued interest in our company.

Unizan's second quarter results were impacted by three items.

The defined benefit plan, the securities gains net of the impairment charge on the trust preferred securities, and the write-down on the MSR asset.

However, when you set those items aside, our second quarter results were in line with our expectations.

The low interest rate environment continues to present challenges.

However, I am pleased with our advances in the following: Our home equity portfolio continues to grow as our retail efforts led to new loans and new client relationships, our corporate lending and SBA lending areas were especially strong.

We continue to expand in our competency in this area and implement our strategic emphasis on business banking, including enhanced focus on cash management.

We achieved substantial core deposit growth as we continued to execute on aggressive marketing campaign to grow core deposits during this period under the leadership of our newly appointed Chief Deposit Officer.

A continued favorable rate environment for mortgage banking led to another quarter of solid mortgage banking production.

Our wealth management team is executing this aggressive plan to increase our overall profitability and improve our non-interest income.

And also, the reduction of operating expenses continues to be an ongoing corporate focus.

Even in this era of margin compression and challenging economic time, we have established and are executing a solid strategic plan that positions the organization for long-term growth and enhanced shareholder and franchise value.

Now, let's take a closer look at the financial results for the second quarter which Jim Pennetti will now review with you.

Jim?

Thank you Roger.

I am going to provide some more detail on the second quarter's results since there were several unusual items, which impacted the quarter's earnings.

As you saw on the release, net income for the second quarter of '03 was $6.8m or $0.30 per diluted share.

In the last quarter, we earned $7m or $0.33 per diluted share.

I will summarize the differences in net income comparing the two quarters and discuss what items impacted our earnings for the second quarter.

Starting first with total interest income, which decreased from $37.4m in the first quarter to $36.4m in the second.

Interest and fees on loans decreased by $1.5m, and one factor which contributed to this decrease was the write-off of $866,000 of accrued interest in fees receivable on nonperforming and charged-off loans.

This write-off was primarily related to Unizan's systems conversion and the treatment of accrued interest and fees on the loan system.

This systems issue has now been corrected and additional controls and procedures put in place to monitor the loan system.

Interest income was also negatively impacted by the continuing decline in rates and a decrease in commercial real estate and residential real estate loans, which were somewhat offset by a 17.6% annualized growth in commercial loans and 12% annualized growth in our home equity product.

Residential real estate production continued very strong during the quarter and we continued to sell fixed rate mortgages into the secondary market.

Since December 31, 2002, our commercial loan portfolio has grown over 25% on an annualized basis.

Despite the economy and increased competitive pressure in our markets, our lenders have continued to build this portfolio.

However, this portfolio has felt the effects of loans that have repriced fairly rapidly both from new production and the refinancing of existing loans.

The commercial real estate portfolios declined as again due to the tremendous competition for good loans.

The supply of good credit eligible borrowers has remained constant at best while the demand by banks to get good assets on their books has increased.

Turning now to total interest expense which increased by $300,000 from the first quarter to the second quarter.

Deposit interest expense increased by $600,000 from quarter-to-quarter, and this increase relates to growth in Unizan's money market and checking with interest accounts.

As we discussed in the last quarter's conference call, one of our strategic initiatives is to grow core deposits.

And during the first five months of 2003, we undertook a statewide campaign to grow money market and checking with interest balances and accounts.

In that period, over $123m of new deposits were brought into the bank along with almost 500 new clients.

These deposits had a 90-day teaser rate, which impacted our interest expense during the second quarter.

As these teasers expire and they began to expire in early May, the rates on these accounts will drop back to market rates.

We have had very good success thus far in retaining these relationships and balances.

We continue to believe that altering our deposit mix and growing core deposits will benefit Unizan in the long run.

I'd also like to mention that we had strong growth in non-interest bearing checking accounts as our corporate bankers continue to execute on our strategy of increasing our corporate relationships, including the deposit relationships our business clients.

Interest expense for the quarter was positively impacted with a decrease of $33m of CDs, including some public fund CDs which we allowed to run off.

Interest on borrowings from quarter-to-quarter was down $255,000 as total borrowings decreased $91m, including $67m of short-term and long-term Federal Home Loan Bank advances.

Management took every opportunity to pay down advances and did not renew maturing advances, given our deposit growth during the quarter.

Net interest income decreased by $1.3m or $0.04 per diluted share from quarter-to-quarter.

The provision expense was $223,000 less in the second quarter than the first, which equates to less than a penny per diluted share.

Jim Nicholson is going to discuss credit quality in some detail in a few minutes, but I will mention that our loan loss reserve analysis shows that we are adequately reserved at this time.

Looking at the loan totals from quarter-to-quarter, the provision added in the net charge-offs, the allowance to loans ratio is at 1.29% same as at March 31, 2003.

We continue to monitor our credits in our loan portfolios, our loan loss reserve methodology, and the assumptions made for the analysis, and we are comfortable with the level of our loan loss reserves.

Now turning to non-interest income, which increased from $7m in the first quarter to $7.7m in the second quarter.

Let me break this down a little more so that you can understand the items, which impacted non-interest income during the quarter.

First, security gains and losses.

We recognized a permanent impairment charge of $960,000 or $0.03 per diluted share on the North Country trust preferred security, which we discussed in our first quarter 10-Q.

This was booked as a securities loss.

We will continue to monitor the public filings of North Country and we will continue our internal credit analysis, as we go forward.

As far as the investment portfolio, we were fairly active in the second quarter as we executed three bond swaps and the sale of a $4m trust preferred security.

With the first two swaps, we sold about $30m of mortgage backs and CMOs and purchased mortgage backs and CMOs which will give us some additional protection against prepayment risk without increasing our extension risk to any great degree.

We also sold about $7m of corporate bonds to take advantage of narrowing spreads in this sector due to the perception of an improved economy and improved corporate profit.

These proceeds were reinvested in various mortgage backs and CMOs.

And finally, we sold $4m of a trust-preferred security at a gain of $877,000.

We saw that this security was trading at a very high premium and believe that it probably peaked -- reached its pricing peak.

In total, we recognized $1.4m of security gains in the quarter or after-tax about $0.04 per diluted share.

We will continue to actively manage the investment portfolio in the coming months, and in general, we will actively manage the balance sheet to attempt to reduce our margin compression.

We are currently analyzing additional securities sales and analyzing the possible pay down of high cost Federal Home Loan Bank advances.

This will allow us to get high cost borrowings off the book and take advantage of the appreciation in the investment portfolio, without sacrificing future earnings.

During the second quarter, we sold $5.3m of SBA loans for gains of $791,000 compared with $760,000 of gains in the first quarter with $7m of loans sold.

The SBA government guaranteed market was very strong in the second quarter both from an origination perspective and relative to secondary market sales.

Fee income is on a record pace for the organization and is primarily the results of extremely strong secondary market pricing for these credits.

Unizan sold $95m of mortgage loans in the second quarter with gains of $1.4m or approximately the same gains as during the first quarter.

Other operating income was down by $342,000 from first quarter to second quarter of '03.

The biggest impact of that line item was the write-down of the mortgage servicing rights assets.

During the second quarter, we wrote down the mortgage servicing rights by $734,000 versus a write-down of $391,000 in the first quarter of '03.

Turning now to non-interest expenses, I'll give some more detail on some of the more significant items there.

Total other expenses increased by $100,000 from first quarter to second quarter.

First, salaries and benefits increased by $600,000 from quarter-to-quarter.

During the second quarter, Unizan completed the termination of its defined benefit plan at an additional cost of approximately $1.2m or after-tax $0.04 per diluted share.

We have discussed this item before and the actual expense came in at our earlier projection of $1.2m.

Deferred loan origination costs increased by $500,000 in the second quarter.

These additional deferred costs, primarily in our mortgage and commercial loan portfolios, helped to offset the increased expense in the quarter for the DB plan.

By adjust for the defined benefit plan and the additional deferred loan origination costs, salaries and benefits actually decreased by about $100,000 in the quarter.

Other operating expenses decreased by $445,000 or about a penny per diluted share.

That decrease was composed of decreases in other professional fees paid and a variety of other expense categories.

Also keep in mind that in first quarter, we recognized an $84,000 goodwill impairment charge, which was, of course, not in the second quarter's figures.

I will close by discussing the margin.

As you saw in the release, the margin for the second quarter of '03 was 3.19% compared with 3.54% in the first quarter.

The write off of the accrued interest and fees receivable, which I discussed at the beginning of my comments, had a significant impact for the margin.

If we normalize the margin for the second quarter, that is we back out the write-down, the margin comes in at about 3.32% compared to the 3.54% in the first quarter.

With the decline in rates during the quarter, the continued repricing of assets at lower yields, and the impact of our cost of funds through the quarter, our margin pressure continued.

The net interest margin for the six months ending June 30th was 3.36% and on an adjusted basis it would be 3.43% compared to 3.54% for the first three months.

Now I will turn the call over to Jim Nicholson who is going to discuss credit quality.

Thank you Jim.

Good afternoon everyone.

Credit quality remained relatively stable during the quarter but showing some signs of deterioration.

At June 30th, 2003 Unizan's nonperforming loans were $23.4m, compared with $17.2m at 3/31/03 and $14.3m a year ago.

Included in the $23.4m of nonperforming loans at 6/30 were $7.8m of government guaranteed loans, of which $6.4m is guaranteed.

On the surface, the overall rise in the level of nonperforming loans is a little more alarming than what the detailed would indicate.

Of the $6.2m increase in nonperforming loans, $2.5m is attributable to the guaranteed portions of sold government guaranteed loans, which have been repurchased from the investor due to their delinquency.

Also, $1.7m of the increase is in residential portfolio, which has historically had lower risk and loss experience.

The remaining $2m is secured by commercial real estate of the $6.2m increase.

Of the total $23.4m of nonperforming loans at 6/30, approximately $15.7m are either residential loans or guaranteed by the government.

The liquidation of the guaranteed portion of SBA loans has been slow nationally due to the volume of loans and liquidation and uncertainty regarding plans under consideration to centralize the processing of buy backs and liquidation.

While this has increased delinquencies and nonperforming assets, we see little risk of loss as these submissions are eventually processed.

Our loss experience during the quarter and year-to-date in the residential portfolio continues to be good as net charge-offs were approximately seven basis points and four basis points respectively on an annualized basis.

While we are not necessarily pleased with the level and trend of nonperforming loans, we believe the risk of these loans has somewhat mitigated based upon the previous discussions.

Net charge-offs remained very manageable during the quarter.

Net charge-offs for the second quarter were $1.4m compared with $1.3m for the first quarter.

Net charge-offs to average loans were 29 basis points for the second quarter versus 26 basis points for the first quarter.

We continue to experience an increase in charge-offs in consumer loans and more specifically the indirect portfolio, due to the down economy and increased bankruptcies.

This has been occurring for the better part of a year now.

While our charge-off levels are up from very low historical levels, they are still quite manageable.

Annualized net charge-off percentages by portfolio for the second quarter were; residential, seven basis points, commercial, three basis points, commercial real estate did not experience any charge-offs during the quarter, aircraft was two basis points, government guaranteed 77 basis points, and consumer 165 basis points.

Delinquencies increased during the quarter.

Delinquency ratio for all loan portfolios was 1.52% at the end of the second quarter, versus 1.28% at 3/31/03 and 1.35% at year-end.

Notes of interest regarding the delinquencies during the quarter were increases in commercial and commercial real estate loans and a large decline in aircraft.

Residential delinquency trends are consistent with Ohio and national trends.

Bankruptcies are up and are a significant part of the numbers.

Again while this has increased delinquencies and nonperforming assets, we continue to see very little translation and to losses.

We continue to remain cautious as the economic uncertainty extends and record levels of bankruptcies continue.

The allowance for loan losses remains consistent.

The allowance for loan losses to total loans ratio was 1.29% at the end of the second quarter, the same percentage level as the prior quarter.

During the quarter the provision for loan losses totaled $1m compared with $1.3m for the first quarter of '03 and $622,000 for the second quarter of '02.

As Jim referenced earlier, we continue to develop migration analysis and other data to facilitate the substantiation and determination of adequate loss ratios and percentages by classification and portfolio.

We continue to measure the inherent risk profiles of the portfolio and evaluate [per] allowance accordingly.

So in summary while we have seen an increase in delinquencies and nonperforming assets, we do not currently see this translating into significantly increased charge-off levels.

This is consistent with the nature of our portfolio being real estate security and government guaranteed as well as our prior communications.

This remains a key area for us and we will continue to manage it very closely.

At this point I will turn the call back to Roger.

Thank you Nick.

To conclude, we continue to be extremely cautious regarding the prospects of a rapid economic recovery in the second half of 2003.

Margin compression is a given.

However, we will not sacrifice credit quality or extend maturities on investments in order to improve our short-term net income.

We will continue to explore balance sheet strategies to combat the margin pressure and we continue to execute on our wealth management strategic plans to increase non-interest income.

Our strategic initiatives continue to focus on future earnings growth and increasing our franchise value.

At this point, I would like to now turn the call back to the operator who will begin the question and answer portion of our call.

At this time, I would like to remind everyone in order to ask a question, please press star one on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Fred Cummings of McDonald Investments.

Yes, good afternoon.

Just a couple of quick questions.

First, Roger, can you talk about this more in detail on this loan growth you are getting?

This is pretty solid in the commercial area.

I am particularly interest in the competitive environment in your marketplace.

Yeah.

Fred, if you don't mind, I will let Nick respond to that.

He has got some detail in front of him.

Fred, essentially, I mean, we are executing on the strategy that we have laid out to expand our C&I portfolio.

And quite frankly, it starts with the fact that over the past nine months or so, we have been assembling our commercial lending team in order to leverage one, our infrastructure that we believe we've developed as well as take advantage of the growth opportunities in the markets that we are in.

And quick frankly, we are seeing the results of that really from the solid team that's been developed here.

As far as the competitive environment, we have encountered an extremely competitive environment, as the subset of qualified borrowers out there has remained constant, maybe even declined during this economic period.

All institutions are out there trying to grow this segment of their balance sheet and when you have that increasing demand with a limited supply, you see obviously increased competition and I think what we have seen this translate into mainly is probably on the pricing.

We continue to see a lot of competition, a lot of aggressiveness out there for the creditworthy deals in the pricing area.

Fred, one of the things I would like to compliment Nick on is the fact that I know we have passed on some transactions where we quickly frankly, from a pricing standpoint, didn't want to lock into fixed rates for an extended period of time.

So, even though we've had good growth, I am extremely pleased with the pricing of that growth and quite frankly, the credit quality of that growth.

And if I can follow-up.

Jim, on the - in terms of the size of credit that you are booking now, are they pretty consistent with what's been in the portfolio in the past?

Yes, we have not -- I've not seen any real material change in the size of the credit and/or the relationships.

We have not gone out there with an increased appetite to find or expand into some real large relationships.

They are pretty consistent with what we have typically had in our portfolio.

Okay.

And then, just one caution -- question for Jim Pennetti.

Jim, would you care to hazard a guess on the outlook for the margins here assuming we get some steady rates from here through the end of the year?

I would hazard that Fred, somewhere in the $325 range, $325-330.

Fred, I want to compliment you, you got more out of him than I could.

Yeah, he did say -- he did hedge a little though.

I said I would hazard that guess.

Okay.

All right, that's good.

Thank you.

Thank you, Fred.

Your next question comes from the line of Steve Alexopoulos of Putnam Lovell NBF.

Hi, gentlemen.

Hi, Steve.

Hi, a couple of questions.

First, with personnel down, I think Jim said 100,000 Q to Q without the impact of the defined benefit charge.

What's really driving that?

Were they headcount reductions in the quarter?

I think Fred, it's just a continued evaluation of expenses related to that area.

Also some impact perhaps by what occurred in that first quarter.

If you recall, quite a bit of an increase from the fourth quarter to the first with the salary expenses and the increases in salaries due to the annual reviews etc.

But, that is something we are continuing to watch as far as the headcount and additional additions to staff.

Yeah, I might add to that.

This is Jim Nicholson.

We continuously look at our organization and try to find efficiencies and we have had some opportunities recently where we might have had some functions that were not completely consolidated.

They were occurring in different regions and I know of two instances where we have been able to consolidate departments in realize some efficiencies, just from the ongoing consolidation.

Okay.

One of the things also Steve is that we continue to look at and we will hear in the third quarter are our incentive plans, our commission plans for various departments.

Beginning to evaluate those a little more closely and seeing if any changes we might make to that.

So, it's an ongoing process, if you will, of looking at that.

Okay.

Steve, it's Roger.

Also, any additions to staff or even replacements to staffs have to be approved by Jim Nicholson and myself.

Okay.

Could you guys talk briefly maybe on the trend in aircraft collateral in the quarter, just maybe what's going on there?

Yes, Steve.

This is Jim Nicholson again.

Overall, I would say the condition of the general aviation market has appeared to have stabilized over the past couple of quarters.

As you recall, we changed our market approach and strategy to go into the singles and light twins.

The piston single market in the past quarter has been the most stable.

Prices remained pretty flat while activities improving.

In the piston multi category, that continues to perform pretty well with few exceptions.

Most of that type of aircraft has been out of production for a number of years.

So, that segment tends to be just a little more immune to the huge inventory numbers that have sensed the turbines downward.

The Jet market, as you know, we do have a remaining portfolio of Jets, I think proximates around $43m.

But, we are not currently targeting that market for future growth.

It continues to struggle.

I think prices continue to erode in that market primarily because of extremely large levels of used inventory and there is just not the demand out there although we are starting to see some players start to, end of that market, looking for some bargains.

So, the demands maybe picking up a little bit, but pretty big inventory levels and those values have not performed well.

Okay, great.

Maybe just one final question for Jim Pennetti.

Jim, with the ten year up recently and mortgage backspreads also moving higher, you talk maybe about your appetite for mortgage backs?

First, maybe the option of shrinking the balance sheet here.

I think Steve.

That's, I would say, that's something that we are analyzing here as far as shrinking the balance sheet somewhat.

I have mentioned in my comments that we were currently analyzing perhaps more sales of mortgage backs or CMOs from the portfolio and then analyzing against that, paying down some of the Federal Home Loan Bank advances that are sitting on our books out there at much higher rates.

So, I think it's clearly an option for us to shrink the balance sheet somewhat to whatever degree we can and using that strategy in getting some of those home loan bank advances off the books.

Otherwise, relative to our philosophy, relative to the investment portfolio, we continue to look at mortgage backs and CMOs as a vehicle to get these cash flows reinvested.

As loan demand picks up, obviously we will be shifting over to loans whenever possible.

But in the mean time, with the cash flows that are coming back which continue to come back at pretty strong levels here.

Right now, that's the alternatives that we see is to continue to go into mortgage backs, CMOs etc., but we continue to look at those as much as possible to make sure we are **not **going to get hurt to any great degree when rates do start to go back up here, Steve.

Okay.

But, this deleveraging strategy that we are now looking at and hope to execute on here as we move forward and make some decisions.

I said that it's to pay off some of those home loan bank advances to get out of some of those higher costs.

Okay, great, thanks, Jim.

At this time I would like to remind everyone, in order to ask a question please press star one on your telephone keypad.

Your next question comes from the line of Brad Nef of FBR.

How you guys doing?

Hi Brad.

First question.

What have you guys done as far as your deposit pricing in light of the Fed funds rate cut?

Well, I will take a first crack at that Brad.

I mean, we evaluate our pricing of course every week and in discussions with our regional Presidents, obviously looking at competition, and the treasury curve etcetera.

We have to whatever degree possible lowered those rates.

We are still remaining competitive to some degree, especially on our money market, our savings, our checking with interest accounts.

With CDs we are probably at the lower half of the marketplace, again with those CDs, not necessarily trying to grow those to any great degree at this point, but we are certainly evaluating wherever we can, again to remain competitive and yet keep those rates as low as possible.

If you had to guess the average decrease in the money markets and interest bearing checking and savings account in basis points that you would reduce those rates forward, what would they be?

As far as our market rates?

Yes.

I am thinking here Brad.

On a week-to-week basis since the Fed cuts, that's not been significant given the level of those rates already on those accounts.

I don't think there's a question, we have not been able to match the entire cut that the Fed enacted.

Okay.

And you guys still feel pretty confident about three and a quarter, 330 margin going forward in light of the fact that there is limited room to move the deposit [inaudible] lower, you guys have a decent number of loans to be priced with prime ANU.

From my understanding you will continue this deposit promotion program?

The deposit promotion program, [that] program actually ended May the 1st.

As far as the promotion and the teaser rates Brad, those teaser rates had 90 days to run.

So we are not advertising for those deposits now.

We are not out marketing those and we don't have the teaser rate in place.

What we are of course trying and attempting to do now is to retain those deposits, build those deposits based on current market rates.

But the actual campaign ended May the 1st.

The initial, the media campaign did.

Now we continue throughout our financial centers to do the financial profiling and when we identify opportunities to generate additional interest checking and/or money market accounts, our financial centers' personnel have the authority to offer a teaser rate, albeit lower than what the media campaign was, but that's really - I mean it's an ongoing process and campaign to generate those types of deposits, but it's more being done internally through our financial profiling process and obviously would be lower rate environment.

The initial teaser rate is less than the previous campaign.

Brad, it's Rog.

Excuse me for jumping in.

One of the things that I have really been pleased with particularly in the last two quarters, we have really spent a lot of time with our training activity and getting out, if you will, throughout the distribution network, the importance of low cost deposits.

And I am just extremely pleased with I think the level of understanding now that our personnel have as to the importance of low cost deposits.

So, I'd like to think that some of this activity with our deposit growth and being able to grow low cost deposits is really starting to take hold under our Chief Deposit Officer and his team.

Brad let me try to get at your initial question little bit differently here on.

Just looking at our time deposits and the average weighted rate over the last three months starting in March, when that was about 356 and it has come down to 350 - 345 and then in June was 340.

So that's continued to ratchet down on the time deposits.

On the DDA money market savings accounts as I mentioned in my comments, with the special that we had in the teaser rates, we were a little bit higher in April and in May on those average, the weighted rate, about 80 basis points versus March's 65 and that was due to the teaser rate that was out there in the early part of the quarter.

But now in June that rate has come back down on an average to about 64 basis points.

So we are starting to see that come down and at the function of the 90-day teaser rates starting to come off and those deposits going back to market rates.

Okay.

Thanks guys.

Your next question comes from the line of Steve Covington of Stifel, Nicolaus & Co.

Good afternoon guys.

Good afternoon Steve.

Many of my questions have been answered, but and I apologize if you have touched on this already.

I had to jump for a second, but what was the size of your trust assets?

What were the size of your trust assets at the end of the quarter and I guess, along the same lines, what trends are you seeing as far as overall account growth in that area?

Yeah Steve, Roge.

We were just a little bit north of $1.1b.

Couple of things have happened there.

We recently brought in a new Director of Investments who had retired from a much larger organization and has actually some nationwide exposure and we are starting to see, I think, some of the foundations and some of our larger clients and even some of our larger non-clients coming in to do business with us.

There again, there's been training going on in what I will call `call-in groups`.

We have started to cross-pollinate and have weekly meetings with teams where you have a corporate banker, a personal trust officer, an investment manager, and a private banker and they actually are doing case studies and we are starting to see a lot more referral coming out of that group into our financial planning group.

So, we are starting to see some things kick in there.

Obviously with the market coming back a little bit, that's helping us too, but overall I think we've probably brought in, I am going to say between seven and ten new fairly senior people in that area that are starting to help us significantly.

That's great.

Your next question comes from the line of Fred Cummings of McDonald Investments.

Yeah, it is just a follow up on the capital issue.

Two questions here.

Jim, in terms of the tangible capital ratio, I think it is around 7%, is that pretty much a floor in terms of your comfort level?

I think it is Fred and one of the things we are doing is analyzing, re-analyzing our capital plans and our capital policy going forward here including our dividend policy.

Looking at capital projecting out as we look at the rest of '03 and our projections for '04, we've done some analysis of that to look at capital levels and set some targets as to where we want to be going forward with those.

Right now on the risk based capital levels and the leverage ratio **we've established a floor of** 50 basis points above the regulatory role capitalized levels and now we are looking at what targets we may want out there as we try to build capital going forward here.

In related, and Roger maybe you can comment on the pay out ratio, now with the thrust of higher pay out ratio, this year you have depressed earnings starting with, when you look out the next year assuming earnings rebound, your pay out ratio is going to be somewhat depressed vis-a-vis some of the others, what's your thoughts on that Roger?

Quite obviously we've been doing an awful lot of rating and studying of that.

Our capital markets committee at the Director level is in the process of analyzing, if you will, our forward-looking position on our dividend policy.

I would rather not comment any further at this time except to state that obviously that's under review and will be coming out, I think, probably in the next quarter or two with the new directions.

Okay, thank you.

Your next follow up question comes from the line of Steven Alexopoulos of Putnam Lovell NBF.

Hi.

You actually answered my question on trust, but maybe I will follow up with a question to Roger.

Roger, I was wondering how you were thinking now about maybe in addition to the new senior people in wealth management?

Maybe your thoughts on acquisition now with the new head in that business?

Yeah, Steve.

I am one of the a little bit cautious here.

I am really still very very cautious on the economy in the rest of 2003 and even going forward into 2004.

You know, I am extremely pleased with the growth of our company.

We are really only a little bit over 15 or 16 months old.

I just want to make sure that we have really got our house in order.

I mean, obviously if something does just fall into our laps and we will certainly look at it Steve.

But I want to continue through the third and fourth quarter refining some of the internal projects we've going on.

We are at the point now where we are really starting to get a handle on some of our line of business profitability.

We taking it and we are starting to see analysis of our branch profitability studies.

So I just want to really continue to cross the T's and dot the I's internally and not necessarily be aggressive at any expansion at this time.

Okay, thanks Roger.

At this time there are no further questions.

Once again I would like to thank you for joining us today and for your continued interest in our corporation.

We look forward to keeping you updated on our franchise development and franchise financial performance, excuse me.

In the meantime, as you are all aware, if any of you have any questions please do not hesitate to call us, we will be happy to take your calls and I would like to thank you very much for your continued support and wish you a happy day.

Thank you very much.

This concludes today's teleconference.

You may now disconnect.