Valley National Bancorp (VLY) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Valley National Bancorp second quarter 2008 earnings release conference call.

At this time all lines are in a listen only mode.

Later there will be a question-and-answer session, and instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, today's call is being recorded.

At this time I would like to turn the conference over to Mr.

Gerald Lipkin.

Please go ahead, sir.

Thank you.

And good morning, and welcome to our second-quarter 2008 earnings conference call.

Now I would like to turn the microphone over to Dianne Grenz to read our forward-looking statement.

Today's presentation may contain forward-looking statements regarding the financial condition, results of operation and business of Valley.

Such statements are not historical facts and may include expressions about Valley's confidence, strategies and management's expectations about earnings.

These forward-looking statements involve certain risks and uncertainties.

Factors that may cause actual results to differ materially from the results the forward-looking statements contemplate include, but are not limited to, unanticipated changes in the financial market and the resulting unanticipated effect from Valley's investment portfolio, unanticipated changes in the direction of interest rates, the effective tax rate, new and existing programs and products, relationship opportunities, technology, the economy, market conditions, the impact of management's adoption, interpretation and implementation of new or pre-existing accounting pronouncements and the ability to realize expected cost savings and synergies from the merger of Greater Community and Valley and the anticipated amount of estimated timeframe.

For written information concerning factors that could cause results to differ materially from the results the forward-looking statements contemplate can be found in Valley's press release, today's conference call, Valley's Form 10-K for the year ending December 31, 2007 as well as in Valley's other recent SEC filings.

Valley assumes no obligation to update any of the forward-looking statements.

Thank you, Dianne.

We are very pleased with our financial performance and remain optimistic about the short-term and long-term opportunities available to Valley and many of the community banks which have maintained a traditional and steadfast approach to managing their balance sheets.

The idiom bank is not generic terminology for all financial institutions.

The composition of each company's balance sheet combined with the diverse products and services offered by each have a significant impact on the inherent risk within each institution.

With the recent pessimism pervasive throughout the banking industry investors and analysts alike should be mindful not to paint all companies with the same brushstroke.

Along with Valley there are many wonderful quality, well capitalized banks which have witnessed erosion of shareholder value, far in excess of what their individual financial results would dictate.

Having analysts and investors performing an in-depth bank specific fundamental analysis is paramount to restoring stability throughout the financial markets.

Merely ascribing doom and gloom for everyone only worsens the current market dislocation, steers capital away from many fine institutions and diminishes potential economic expansion opportunities throughout the country.

Historically Valley's performance has excelled during times when its competition's strategic focus shifts inward.

For the last few years the growth opportunities available to Valley were limited due to a multitude of economic and competitive pressures.

The yield curve was negatively sloped.

The level of interest rates were low.

Little concern for credit quality by many banks.

Risk-based financial pricing for both deposits and loans was absent from the marketplace, to name a few.

However, today's current environment provides tremendous opportunities.

The yield curve has begun to normalize and irrational non-risk-based pricing of loans and deposits has diminished as evidenced by the 13 basis point expansion in Valley's linked quarter net interest margin.

Many of our competition whose balance sheets expanded without regard to risk -- interest rate risk or credit risk, and at unsustainable levels in recent years, must now focus on managing capital in light of their current credit deterioration.

For Valley and other similar banks, the return of the traditional banking model reinforces the [methodology] with which we have consistently operated since 1927.

For the quarter Valley's diluted earnings per share were $0.33 compared to $0.25 in the prior quarter and $0.31 for the same period last year.

The increase in earnings is mainly derived from strong loan growth coupled with an expansion of our net interest margin.

On a sequential quarter basis total loans increased $377 million or approximately 17% annualized.

The increase in the commercial loan portfolio of approximately 24% annualized is mainly attributable to expanded lending opportunities in Valley's core market.

Many of the new lending relationships are high-quality business customers apparently being pushed out by other banks.

For the most part these new borrowers may be categorized as relationships which in the past we were unable to attain, largely due to the persistent irrational pricing that was prevalent in the marketplace.

We are most pleased to report that credit quality continues to remain strong at Valley.

Valley's consistent and conserved underwriting standards remain the hallmark of the institution.

While not totally immune to the widespread credit deterioration unfolding throughout the economy, the balance sheet management strategies and constrained in asset generation employed by Valley over the past few years continues to pay immense dividends.

The manner in which an institution underwrites each credit should be uniform irrespective of the credit cycle.

At Valley credit underwriting is not conducted to meet market competitions.

As a result, riskier products such as subprime residential mortgages never made their way into our loan portfolio.

For the quarter Valley's annualized net charge-offs were 0.2% of average loans; while for the same period nonperforming loan to total loan ratio decreased from 0.37% last quarter to 0.30% this quarter.

Total loans past due greater than 30 days continued to decline, decreasing from 1% at year end to 0.93% in March, and 0.82% this quarter.

Valley's auto portfolio, which has been an area of concern for many of our peers, continues to perform better than the industry and in line with management's expectations.

As of June 30th Valley's auto loans past due greater than 30 days equaled 1.15% of total auto loans.

The average portfolio FICO score is 736 and approximately 94% of the portfolio consists of loans originated in New Jersey, New York or Pennsylvania, areas where we have operated for many, many years.

Although on an absolute basis recent charge-offs within this portfolio are elevated when compared to prior periods the amount has remained relative to the overall size of the portfolio.

Additionally, historically Valley recovers approximately one-third of all consumer loan automobile charge-offs, and that is after the sale of the collateral.

Although the timing of each recovery differs and in some cases the recovery will be in future years, Valley exercises all means necessary to collect any and all losses.

One should not confuse Valley with other participants in the indirect lending arena.

Many of our competitors recent losses stem from purchased loans, out of market and with an eye towards growth and away from credit quality.

While we have been active in this marketplace since the 1950s through multiple credit cycle's, our automobile lending philosophy is consistent with that of every other loan portfolio within the bank.

We underwrite every loan here in Wayne irrespective of where the loan is originated.

We believe our prudent lending strategy focusing on strong credits, coupled with our experience in this market will continue to generate relatively low loan losses, good returns and distinct long-term growth opportunities.

On July 1 we closed our previously announced merger with Greater Community Bancorp.

We anticipate the acquisition will be accretive within one year.

All of our initial model assumptions are consistent with the current projections.

Our systems integration is on track for August, and we will begin to realize a large number of our projected cost savings in the third quarter of 2008.

As a result of the acquisition, we obtained approximately 450 new commercial lending relationships and since the announcement we have unable to retain the vast majority of Greater Community's branch and commercial lending staff.

The impact to Valley's capital ratios as a result of the acquisition will be largely neutral.

At quarter end Valley National Bancorp's regulatory capital declined slightly, largely as a result of the increase in risk weighted assets as Valley's earning asset composition shifted from lower weighted investment securities to loans.

Earnings retention remained positive and continues to support our normal quarterly cash dividend to shareholders as the dividend payout ratio for the quarter was approximately 60%.

At June 30, 2008 the Bancorp's Tier 1 risk-based capital ratio of 9.51% and total risk-based capital ratio of 11.25% are well above the Federal Reserve's guidelines for well capitalized bank.

Valley has no plans to raise additional capital or reduce its current annual dividend of $0.80 per share per year.

For the last few years management teams with short term focus have dictated the direction for many within the banking industry.

Unfortunately as a result many investors are left holding the losses.

For Valley and other similar institutions the current marketplace provides an excellent opportunity to leverage our balance sheet to generate long-term sustainable earnings, while in the process expanding shareholder value and the franchise's worth.

Alan Eskow will now provide a little more insight into the financial results.

Before I begin please note a slight change in the presentation of our financial statements from prior periods.

The fair value mark to market adjustment on Valley's own trust preferred security, which was previously recorded in other expense, has been moved to trading income within the noninterest income section of the statement of income.

The reason for the classification is to remove any potential confusion that fair market value adjustments have on Valley's core operating earnings.

All prior periods have been adjusted to reflect this change in our earnings release today.

As indicated earlier in Jerry's comments, we are extremely pleased with Valley's second-quarter results.

Many of the balance sheet's management strategies enacted during the preceding few years have begun to demonstrate their value and have positioned Valley to capitalize on current market conditions.

Reported net income for the quarter of $41.5 million or $0.33 per share included a number of non-core items.

Exclusive of the deferred tax valuation allowance adjustments of $6.5 million, net losses on security transactions net of tax of $573,000 and net trading losses net of tax of $36,000, after-tax core operating income would have been approximately $35.6 million or $0.28 per share.

Core linked quarter operating leverage was a positive 7.24% mainly attributable to increased net interest income coupled with a reduction in operating expenses.

On a sequential quarter basis the net interest margin expanded 13 basis points.

The increase is mainly attributable to the reduction in the cost of deposits combined with a reallocation of short-term trading assets, including federal funds, the higher yielding lending opportunities.

As I indicated during last quarter's conference call over 80% of Valley's $3 billion certificate of deposit portfolio reprices in a 12-month period.

Due to Valley's asset sensitive balance sheet the immediate decrease in short-term interest rates realized in the first quarter had a negative impact on Valley's net interest income, and the margin until such time as the certificate of deposit portfolio repriced downward.

We continue to witness a decline in the cost of deposits and anticipate a modest increase in the net interest margin under current market conditions.

Noninterest income on a linked quarter basis declined approximately $1.3 million due to a net gain realized from the mandatory partial redemption of Visa stock in the first quarter, partially offset by a decline in net trading losses and net gains on available for sale security transactions.

Additionally, insurance premiums declined due to annual commission payments received in the first quarter.

The increase in service charge income is in part due to a reduction in the earnings credit, a result of the decline in the market and the level of market interest rates combined with Valley's continued strategy to actively reduce the number of deposit accounts on waive status.

Noninterest expense declined $3.5 million to $64 million in the second quarter; a decrease in stock award expense combined with the anticipated decline in payroll taxes accounted for a majority of this decline.

Compared to the same period one year ago noninterest expense remained relatively flat in spite of an additional $1 million in operating expenses attributable to the nine de novo branches opened.

The composition of Valley's earning assets shifted from the prior period although total assets increased approximately $27 million.

During the quarter Valley was able to continue its balance sheet management strategy of reducing short-term trading assets by redeploying the gross proceeds into higher yielding loans.

Just last year Valley maintained trading assets and federal funds sold positions of approximately $1 billion.

During the last 12 months these positions declined approximately $911 million, nearly equal to the $864 million increase in loans during the comparable period.

This strategy enabled Valley to adjust the composition of earning assets to higher yielding alternatives without leveraging the balance sheet or being forced to compete on price for deposits.

As Jerry indicated earlier, loan demand in the second quarter was brisk with total loans growing approximately 17% annualized.

Loan originations were strong with the exception of home equity and construction lending.

Both areas where we have increased credit scrutiny in light of the current marketplace.

Although we do not anticipate sustaining loan generation at this level, we are optimistic loans will continue to expand for the remainder of 2008.

As of June 30th Valley owned 11 investment grade perpetual callable securities issued by either Fannie Mae or Freddie Mac with a book value of $78.7 million.

During the quarter we realized $903,000 of impairment charges attributable to one Freddie Mac security.

Recent price volatility within these securities has been elevated as market concerns regarding the long-term viability of each institution fluctuates.

We believe the recent price depreciation within these securities is a market phenomenon that will be resolved in the market in due course.

However, we will monitor each security closely and apply any potential impairment in accordance with generally accepted accounting principles.

Total deposits decreased slightly from the prior quarter as Valley attempted to match funding duration with that of the assets being originated.

Within the current marketplace it is nearly impossible to attract long-term fixed rate retail deposits without offering an above market rate.

As an alternative, Valley actively reduced high-cost government and certificate of deposits with similar priced longer duration borrowings.

By matching the duration of the assets originated with their funding source the impact of future interest rate movements on net interest income will be tempered.

For the year Valley has opened eight de novo branches which have generated over $230 million of new deposits and at an average cost of 4.32%.

As deposit specials offered at each de novo location expire Valley actively attempts to migrate the customer relationships to mirror that of Valley's legacy branches.

Valley's recent de novo successes bears this out as the cost of deposits in the second quarter of the branches opened during 2007 and 2006 were 3.08% and 2.65%, respectively.

The loan loss provision for the quarter was $5.8 million, an increase of $1.8 million from the prior quarter.

The allowance for credit losses as a percentage of total loans declined from 0.87% in March to 0.84%.

In the press release Valley included a table outlining the allowance allocation by loan category.

Exclusive of Valley's residential mortgage and home equity loan portfolios, Valley's current allowance coverage ratio is 1.13%.

We believe our current reserve allocations are adequate based on the current composition of loans, current delinquency rates, loss history experience and expected future losses.

Future period loan loss provisions will continue to reflect actual and expected delinquency rates.

Net charge-offs as well as economic conditions prevalent in the marketplace.

Additionally continued strong loan growth is another variable which will directly impact the future provision levels as that is factored into our methodology.

Commenting on nonperforming assets, OREO increased during the quarter to $4.4 million as a result of one property from non-accrual of $3.5 million, for which we expect only a small loss, if any.

Additionally, other repossessed assets increased to $4.2 million, which includes an airplane repossessed for $2.3 million and an increase in repossessed autos of approximately $700,000.

As Jerry mentioned earlier, Valley's capital ratios remained sound; Valley's tangible common equity to tangible assets ratio as of June 30, 2008 was 5.86%.

The tangible common equity to risk-weighted assets for the same period was 7.43%.

Valley's strong capital ratios allowed flexibility in the manner in which equity is deployed whether it be adding additional financial leverage, bank acquisitions or other strategies which may be accretive to future earnings.

With this I conclude my prepared remarks, and we will now open the floor to questions.

(OPERATOR INSTRUCTIONS) John Pancari, JPMorgan.

Can you just give us a little bit more detail on what you are seeing in the New York economy, particularly in your exposure to the jewelry industry, and if you are seeing any downturn there.

What your expectations are.

And then broadly just your expectation for if you are seeing any indication of the slowing, slowdown in demand here in New York just as a result of the fallout in the financial industry and how that could impact credit?

Thanks.

We really haven't seen much of a downturn throughout most of our customers other than the fact that most of the builders that we do business with have pretty much backed away from the market, and that backing away from the market is something that took place probably 18 months ago.

So we see a downturn in construction loans, particularly in New Jersey where most of our construction lending takes place.

The overall economy seems to be holding up pretty well in the greater metropolitan area particularly to the slice of the market that we do business with.

The jewelry trade has not -- the customers we deal with have not shown any ill effects at the moment.

Their cost of some of their product has gone up, but there has been active usage of their lines of credit, levels lower than in the past or similar to the past.

So we have not seen any slowing down in their business.

In recent visits with many of them have indicated that they continue to find good pockets in which to sell.

We are not heavy in the retail jewelry trade.

We supply -- our clients supply some major retailers, but they also supply individual product to custom jewelry houses.

Ironically we were out visiting, myself included, recently with some of our larger accounts and they are telling us their biggest problem is getting product, especially in the larger diamonds.

But again, as I say while we are big in that business we are in a slice of it that most people don't understand.

Total outstandings are less than $150 million in the entire portfolio.

I'm sorry, what was the total outstandings again?

It is less than $150 million.

(multiple speakers)

And in terms of the growth that you saw this quarter in C&I and what you have been seeing in recent quarters, can you discuss a little more granularity about what types of industries they are, where are you still seeing the good demand on the pure commercial side?

A lot of these are customers that we have gone after for years and just not been successful because they tell us the conduits and some of the larger institutions were making credit available to them at numbers that we just never understood.

So we backed away.

We wouldn't compete by dropping our rates to those levels.

It hurt us on our growth.

Now they are coming to us and they are saying that the institution is pushing them out, which they don't understand but I do because who can find another home, but the best of your credits?

We are still very selective.

Obviously we don't approve every loan that walks through the door, but we are seeing a lot of opportunities for businesses, some apartment buildings.

The growth has come across all broad lines of business except, as Jerry indicated earlier, the construction side where our rather substantial client base has decided to hold off and for the most part in this market.

A lot of the growth is in the lower end of the middle market that we have been after for continued time period.

And we also have to attribute a substantial amount of the growth to the fact that we added probably 20%, 25% more lenders over the course of the past 15 to 18 months.

So it is not just we got lucky and it dropped into our lap.

We got a much larger group of people hitting the streets, and that coupled with the fact that the competition, some of the competition has run into some roadblocks has made it possible for us to broaden our base.

We are not picking up a single particular industry and as I think I indicated a moment ago, something like the jewelry trade where there is clearly opportunity, we have not expanded rapidly.

We are being very selective as to who we will take on to replace credits we might let go ourselves.

We see some opportunities that just are jaw dropping.

We had some borrowers who were very, very substantial, have huge liquidity who own apartment buildings in New York City, for example where the loan to value is maybe 30%, and they are being encouraged to find homes elsewhere.

Obviously this is an easy loan for a borrower to move.

That is some of what we are seeing.

Thank you.

Ken Zerbe, Morgan Stanley.

My first question is just in terms of the fair value adjustments on your subordinated debt; can you just give us the dollar amount that you received in terms of the earnings benefit this quarter and how does that compare to prior quarters?

I think what is important is we did see a gain of about almost $2 million on the subordinated debt, but that being said, we also had losses on other trading securities that more than offset that.

So while there was a gain in that there were losses on other trading securities, so I think if you look at the P&L you will see that the net for the quarter was $1.2 million or almost $1.3 million in net loss position even though that was a gross number of $2 million positive.

And that fluctuates around, obviously.

It is a market-driven number, so it is -- each of them seem to move obviously with the market every single quarter.

And how does that $2 million gain though on the sub-debt relate to the gains or losses you have taken the prior period?

Are we seeing more volatility now than we have in the past?

I think there is probably at least at this moment since June 30th more volatility.

I don't know that I saw more as of June 30th, but I think since then there has been more as there has been more capital raises and it has been -- they have all been getting price to market which is substantially higher than our original debt of 7.75.

But by the same token, I have other trading assets that are being mark to market at losses for the same reason.

So they are really offsetting one another almost dollar for dollar.

Understood.

Then the second question is on the Fannie Mae and Freddie Mac securities.

If -- I guess we all know that the value is declining substantially for those.

If you were those mark to market today, how much of that -- what kind of write-down are we looking at, and what would the impact be on your capital ratios?

You know, I think we haven't really calculated anything on capital ratios.

I think first of all there is a lot of as you know, dislocation going on in the market right now with this.

There is a lot of volatility, and we have a lot of issues which are thinly traded.

I think it is very difficult to give you numbers today.

The June 30 number which we indicated was about $3.5 million underwater, that number will grow obviously if things stay the way they are.

But us like anybody else that owns these securities are going to wait-and-see what happens with the marketplace, with Congress and so forth and how this all plays out.

Understood.

Thank you very much.

Peyton Green, FTN securities.

I was wondering if you could comment a little bit on the opportunity to continue to pull share from others.

How long do you think the belt tightening will go on for others?

As I go back to the early 1990s when we found ourselves in a very similar position, it continued for about a year and a half, two years before the market stabilized and the competition stopped pushing people out.

This is just an opportunity for us that we see -- it is kind of hard to project far into the future, but I think it is going to continue at least through the foreseeable future.

Okay, and in terms of your loan growth guidance, is that more in response to just the general economy, factoring in that you're going to continue to pull people or are you also being conservative on that?

We are being conservative.

We looked at our growth.

It is -- our growth has really come from new additional business more so than it has our existing clientele expanding their borrowing relationship with us.

There is some of that obviously of course, there are always borrowers that are looking for more credit, but we looked at our line usage and there is very little change from May to June.

We look back, it has been relatively consistent.

It is actually up about $100,000.

Yes, but to --

I mean the quarter which is not a significant amount.

$100,000 and how many million is it?

Excuse me.

It is $100 million over the quarter.

So it is.

We have -- you are talking about $100 million on maybe $400 million in commitments.

It is really almost --

Okay, and then on the deposit side, is that piece a little slower to pull over?

Yes.

That is the opposite.

In fact those institutions that are having difficulties are the ones that are out there offering the highest rates when they are wanting to shore up their funds, available funds.

They are going to pay crazy rates.

We see some of our competition are paying rates a point over the market.

Doesn't that tell you something about their condition?

That being said, we have been increasing our rates even though we do expect the pricing to come down overall on a quarter to quarter basis.

We have been increasing our rates relative to market rates.

And we are comfortable that we will be reasonably competitive in the marketplace.

And if you think of the repricing on the CDs is there an [outsize] benefit in 3Q or 4Q?

There will be a benefit, yes, I think we indicated there will be a benefit continuing at this point if rates stay where they are.

We will see some continued benefit.

Okay, great.

Thank you very much.

Collyn Gilbert, Stifel Nicolaus.

I just want to say thank you for reporting a quarter like this.

I know many of us were desperate to find something like this and it made my Wednesday, so thank you.

And thanks for doing it a week earlier, too.

That's good, too.

Anyway most of the questions have been asked, and I just wanted to get a little bit of clarity in terms of the rationale behind the reserve.

And I hear you, and I see how you guys have broken through the allocation and that type of thing, but given the market and given pending deteriorations simply because of the slowdown in the economy, where do you sort of see the maintenance of that reserve being?

I know that growth was very, very strong this quarter but on a longer-term view of what the strategy is there for the reserve?

I don't think it is any different than what we said to you before.

We look very closely at delinquencies.

We look at trends.

We look at the economy.

We look at growth.

All of those things are factored into our methodology for the reserve.

We actually had a fairly large review of our construction portfolio during the past quarter and our credit people were very comfortable with where that reserve was.

So that being the case we are telling you that we look at it all the time.

We don't see a reason to just expand it to expand it.

That being said if there are factors out there that warrant us expanding the reserve then we will expand it.

It is as simple as that.

We monitor it very closely.

We get comfort and the Board gets comfort from our loan review area which monitors it.

We get comfort from a review that is done by our risk management area.

So it is reviewed.

We have to substantiate it internally to the Board as well as to the rest of our shareholders.

Our Board is very concerned about making sure that that reserve remains adequate.

So if it looks like our loans continue to grow obviously we're going to be adding more reserves to cover the growth.

If unfortunately delinquencies were to rise we would add more for that reason.

We want to make sure that the reserve is adequate.

Okay, so as it stands today as you look at the coverage in terms of reserves to MPAs, that is indicating that the migration of those MPAs turning to loss is not a huge threat?

That is correct.

Your assumption is correct.

And you know what I indicated before we had a number of items move into OREO and nonperforming, a lot of those that before they moved in, losses if there were any were recorded.

Now there may be some additional but we don't expect that to be substantial at all.

So as we move through these we have already recorded these losses.

That's helpful.

Quickly, when you spoke of the delinquency trends in the auto portfolio, I think you said 115 for 30 days past due.

And you said 94% are originated in New Jersey, New York or PA of the overall portfolio.

But of the delinquency how much of that, what is the percentage of those loans are in market versus out of market?

It is pretty consistent.

We have not -- there is not enough of a variation to really identify anything of a material nature.

We do all the underwriting, again, as I said a few minutes ago, we do all the underwriting here in New Jersey.

And we look at all the credits with the same magnifying glass that we look at no matter where they are located.

Everybody is worried about cars and I heard this repeatedly about people are going to stop paying on their cars because of the rising price of gasoline and if they are driving an SUV they are stop paying.

I know an awful lot of my neighbors and friends drive SUVs.

None of them are planning to stop paying on their car.

I ask everybody who is listening on the call, you got an SUV, are you planning on stopping making the payments?

Probably not.

There are people who obviously are affected by the price of gasoline and are going to have to do things and some of them may not be able to make their payments but that has always been the case.

Which takes it one step further, so the repossessed assets that you are seeing are repossessed cars.

Are you seeing a trend, a change in trend there (multiple speakers)?

(multiple speakers) careful, Alan pointed out that the (multiple speakers)

We bought a large airplane in there of (multiple speakers).

Right, I know; you said $700,000 in autos, right?

Right.

But you got to remember the portfolio is larger, too.

But I am just wondering if there is any deciphering trend among the autos that are getting repossessed.

No, no, you know it is very difficult.

Clearly the impact of gas and a shifting desirability of vehicles from trucks and SUVs which for the last 5, 10 years have been the darlings of the suburban homeowner, they are focusing more on cars.

And when we do repossess a truck or SUV that shift in desirability is being reflected in the auction prices we can realize when we do liquidate that collateral.

So our losses when we do repossess a vehicle are skewed more to trucks and SUVs than they had been.

This is just a function of the economy and it is something that we will work through.

Okay.

That was all I had.

Thanks, guys.

Gerard Cassidy, RBC Capital Markets.

Following up on the auto stuff, just on the SUVs and trucks -- and I apologize if you guys already said this -- what percentage of the portfolio is in those -- I hate to say higher risk vehicles.

They are not really higher risk.

There may be half of the portfolio, but you have to look around your neighborhood, look in the parking lot of the bank, what are the cars.

Our portfolio pretty much mirrors what you see on the street.

It is not a surprise I don't think to anybody.

And while people may moan and groan about how much it costs them to fill up the gas tank I think they will drive less, but they are still going to make the payment.

They still need the car to get back and forth to work.

People bought those vehicles for a reason, either to transport their kids, their soccer equipment or other recreational activity that they had a need for.

They are still going to have to do that.

Each morning when they go to work maybe they will elect to take the four-cylinder car rather than the SUV now but they still need that vehicle.

No, no.

I agree and I'm with you guys; unemployment drives the numbers, and what we are seeing is should these things go into repossession because of higher unemployment, that is when it becomes an issue because the values of these things have plummeted as you guys know better than I in the aftermarket because nobody is buying the new ones and so on and so forth.

More importantly, though, Jerry, in terms of growth through consolidation, can you share with us -- have you seen any increased interest of smaller community banks in your footprint that might be interested in not sticking it out and deciding to sell and if so, have they lowered their price expectations at all?

All you guys who deal with them, we would be happy to do some acquisitions.

We just finished, as you know, in record time the acquisition of Greater Community Bank.

So far as I mentioned the integration went wonderfully.

We have very high expectations as to what that is going to do for our franchise.

That being said, now we are ready to look for something else.

So I would be happy to find somebody who would be interested in getting together with us; if they are listening in, give me a call.

Sure, sure.

Has there been any opportunities for you guys with Congress now being taken over by TD, I thought they were going to change the signage and everything, so on and so forth.

Have you seen any fallout from that where customers are just not happy with that and they are coming over to you guys?

Not particularly.

You know, they were never a major lender, so you wouldn't see wholesale movement of their borrowing base.

We might see an occasional loan here or there, but not on a massive base because they didn't have that many.

I just think that there is going to be some dislocation as you pointed out in the marketplace.

I think there is going to be some frustration on the part of some of the smaller institutions and it may create an opportunity for us.

We certainly would like to expand the franchise that way.

Finally on the deposit side you mentioned that some of these weaker institutions are paying up for deposit rates.

What are some of the six or twelve-month CD rates that you guys are seeing in your footprint that you kind of say you roll your eyes at that makes it a little more challenging?

The biggest one I think we are probably seeing without mentioning names is probably in the 4% to 4.5% range right now between six and twelve months.

Great.

When someone is paying clearly 1.5 over the market for a twelve-month CD, they are scrambling.

And finally, there has been some talk this week with Bernanke and other officials and we had CPI come out today, PPI yesterday.

It seems like conventional wisdom is moving toward that inflation could be a problem for this economy in the next twelve months.

If it is and after the election -- we are now in 2009, they start raising short-term interest rates, how will that -- how can you position yourself or how will that affect you I guess for '09?

If the Fed funds rate goes from where it is today about 2%, to 3% by the end of '09?

You just saw a lot of smiles around the faces of my lending office.

We are (inaudible), so it would have a positive effect upon us.

Initially we see our prime rate go up when that occurs and that just helps the bottom line initially.

Because our deposits don't move as fast as our funding sources don't move as fast as our assets move.

So if the Fed raises rates, interest rates on our assets all of our prime-based loans, they go up on day one.

And the reverse is what hurt us over the last couple of years as the Fed kept lowering rates.

But this is the reverse.

This is happy time.

Great.

Thank you.

Bob Hughes, KBW.

Maybe a couple quick follow-up questions on auto, and I apologize if I am repeating anything; I did pick up a few details.

I think the truck, SUV exposure does generally mirror that of the industry.

The breakdown between new and used.

About half and half.

About half?

By the way, those numbers haven't changed, going back as far as our records can tell us.

We have been in this auto business since the '50s, and our performance on new and used almost identical.

The amount of defaults we have on new cars versus the amount of defaults on used, they run almost identical.

Is the severity on new typically higher than used?

No.

Given that once you title a vehicle and drive it off the lot --.

One of the ways we get the new in competition with the captives is generally when the captive is offering a cemented rate to move the vehicle, they offer the customer the alternative of a cash rebate, call that equity in the vehicle in lieu of the cemented rate.

We then take that deal as a market rate financed transaction, applying that rebate to what would normally be a loan balance.

So we are getting that loan at a discounted price in that new car market.

So that helps us when and if we ever get into a liquidation situation.

Also, in response to the rising price of fuel over the last six to nine months as tight as our standards have always been, we have continued to tighten our lending standards requiring more money down on the vehicle, looking for even higher FICO levels.

So we have in fact here waiting doing nothing saying that, okay if the price of gas goes up we are just going to wait until it affects us.

So we have been responsive in a positive fashion for some time now.

The percentage of our portfolio with FICO scores on the high side of the scale has improved over the past two years as Jerry said.

We were constantly adjusting to market conditions our risk profile and our adjustment has been for the better.

In your Q I know you made mention of expanding the geographic presence.

Have you guys talked about the breakdown of your indirect portfolio geographically?

How important is Florida to the overall franchise?

It is very, very small.

The percentage of our --.

Our originations are running about 6% of the overall.

So it is pretty small and we are also in some of the better markets.

We are not in some of the markets that are really seeing huge problems in the housing side and unemployment.

A follow on on your favorite subject, Alan, reserving methodology.

Because if we could just take a look at the June allocations for consumer loans versus March, I guess I am surprised to see not that it is dramatic, but that the allocation of the reserve and in general I think the dollar terms.

Well the dollar terms did not change too much, but the allocations seemed to go down a little bit to consumer loans.

And to me even if you are not seeing any increase in frequency and your delinquency metrics remain incredibly tight.

But if you are not even seeing increase in frequency, I think aren't we seeing increases in severity across auto and home equity by the day here, and wouldn't that argue for.

We are not seeing anything in home equity.

As a matter-of-fact as we indicated in the release and you may have seen it, Bob, SNL Financial just ranked us within the top 10 institutions in the United States on credit losses in home equities as having zero credit losses.

So from the standpoint of home equity I'm not sure why we should be increasing it.

We are seeing almost no delinquencies and then in terms of credit losses we have zero.

So I'm not sure why I should be increasing the home equity portfolio.

The fact that others across the country did some 125% loan to value lending or purchased portfolios or things like that, we are only lending in our own market.

And based on that lending and our underwriting and the fact that we are not sitting out there exposed in what I will call unsecured positions that I think a lot of other guys are doing, we are comfortable with where we are at.

We haven't seen losses in the home equity at all.

In fact, we do some things that I'm sure a lot of other institutions don't.

We actually monitor the checks that come in on the home equity to watch where the money is going.

We will call the customer.

We have the right to freeze the line if we see that the checks seem to be going to pay off their -- make every credit card payment every month -- we will just freeze the line.

We will cut the line off.

So we monitor a lot closer than most people realize.

Bob, just on the other consumer which obviously includes the auto side, on a real dollar basis that reserve has been increasing as the portfolio is going up.

If you look across the spectrum from '07 into the first quarter of '08 and '09 -- into the second quarter of '08.

As a percentage basis for the moment it is relatively flat.

It hasn't done much but we are watching it very closely as we move through the cycle.

So we will have to just continue to monitor it.

That is what I am going to tell you at this point.

Maybe one final question before I let you get back to happy time.

Auto losses in the quarter, generally where do you see the level of auto losses running, this quarter, past few quarters?

They are running up a little bit from where we had been.

But again, it is higher because we've got a bigger portfolio.

As that starts to settle in over a period of time you are going to see some additional losses.

But we think it is still well-controlled.

And we are comfortable with it.

Obviously we don't want to see any higher losses, but that being said, I think as we've said before in this environment and with what is going on in the world of autos and gasoline and so forth, it would be foolish of us to think we are not going to see losses.

But I think we have it contained.

I understand.

I mean I know you guys underwrite prime paper and all that; is the level of losses generally sort of in the 70 to 80 basis point range, or.

No, lower, lower.

Substantially below that, substantially below that period.

You heard a lot of noise.

We are probably running around 50 basis points.

Very good.

Thanks, guys.

Matt Kelley, Sterne, Agee.

I was wondering if you guys can give us an update on any kind of trust preferred pools, kind of bank issuer pools that you guys have in the portfolio.

We really have almost none of those in our portfolio.

We are pretty much immune to it.

We may have a couple of small pools, but I mean a couple, less than a handful.

What would the dollar amount of those handful be?

$20 million or less, about $20 million.

Okay.

And then on the Fannie and Freddie preferred issue, I mean, how are the auditors going to treat that over time?

You are looking at some of those trading down 50% or 60% from issue price for both of the agencies.

How long are they going to let that disconnect between carrying at a 5%, 10%, 15% discount at June 30 versus those things trading in the market down 50%, 60%?

I think I answered that already, but let me just go back to say that we did take the fairly large write-down back in December of about $18 million.

We took a small write-down at the end of the most recent quarter.

And as I said, we are continuing to monitor it.

We are going to do everything we have to do in accordance with generally accepted accounting principles.

And if it requires an impairment, we will do that.

The question becomes whether it is an other than temporary impairment or whether it is just temporary.

I think for the moment while the government is trying to work through this situation to determine what will happen going forward, we are viewing this as a temporary impairment, and we will wait to monitor it through the quarter.

Okay, and just to kind of clarify something I was looking through the call report in other domestic debt securities and in available [health] maturities it is like $300 million and available for sale is $160 million.

What is in there?

We own some trust preferreds in individual institutions.

Okay.

Not pools but generally individual, all investment-grade rated, where we are pretty comfortable.

What is the dollar amount of single issuer trust preferreds?

Almost all.

So it is about $460 million then?

Yes, I would say it is in the mid -- yes, it is in the 400 plus range.

How are you approaching the valuation of those?

Those have seen some pretty big hits as well.

I think the issue there is that those are securities with maturities, number one.

And I think stated maturities are handled very different than perpetual preferred.

And so at the moment, while they are below market, they are below market more on an interest rate basis and not a credit rate basis.

And we are comfortable they are being mark to market at all through (inaudible) and at the moment unless the accounting rules change that is how we will continue to handle them.

So they are both being valued on kind of the cash flows that they are continuing to spin off and making payments not on where they are actually trading (multiple speakers).

Not cash flows.

These are all actively traded securities.

So they are not based on cash flows.

They are based upon market price.

Okay.

All right, thank you.

Peyton Green, FTN Securities.

I was just wondering if you could comment a little bit on the growth in residential year-over-year and how much more opportunity there is.

And also, the decrease in home equity, is there anything in particular going on there?

Residential grew nicely for our year-over-year largely as a result of mortgage bankers, mortgage brokers being taken out of the game.

Mortgage bankers and mortgage brokers who had originated and sold to conduits no longer have those takeout capabilities.

Their warehouse lines are being curtailed.

So we are seeing a nice increase in that business.

Quite a bit of resale home transactions still occur in our marketplace, and this is good.

One of the things that we did do, we did exit the Florida market for residential home originations, back in February.

We had a small loan production office in Jacksonville, Florida, we became concerned with some of the metrics we were seeing down there, and we decided to close that operation which we did.

And subsequently we have sold any of the conforming loans that were originated out of that facility into the secondary market.

So we have no credit exposure lingering from the effort that we put in for that loan production office.

On the home equity side, as Jerry alluded to or specifically stated on the deposit end of the balance sheet with a lot of irrational pricing going on the deposit side we have tended to set -- take a back seat on our home equity originations as we've seen a lot of the competition at prime minus 1.01%.

We just don't see 4% assets as a good thing to have on our balance sheet right now, especially with concerns over people's equity positions.

That coupled with our underwriting philosophy of staying away from high combined loan-to-value ratios on our home equity portfolios has not allowed us to be an aggressive participant in that market.

And consequently, we have allowed our outstandings to run down a little bit in that sector.

Just in terms of the overall production on the residential side, what do those loans look like; loan-to-value, average loan size, something like that?

Our average loan-to-values typically run 64% to 72% loan-to-value ratio.

Our credit scores are generally averaging north of 750.

They are excellent loans.

Okay.

And would those be jumbo or conforming or a combination?

Both.

Great, thank you.

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