Zions Bancorporation, National Association (ZION) Q2 2008 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter Zions Bancorp. Earnings Conference Call. My name is Amanda, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions]. As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Clark B. Hinckley, Senior Vice President, Investor Relations. Please proceed sir.

Good evening everybody. And thank you for joining us for this quarterly conference call on July 17th, 2008. I notice that there are number if Zions Bancorporation employees who are on the call, we're going to invite to hang up your telephones and join us via our webcast at zionsbancorporation.com. That will help us save money and that's an important thing to do in this environment. During this call, we will be referencing several pages from our earnings press release, if you do not have a copy of this earnings release you can download it from our website in PDF format and the website again is www.zionsbancorporation.com. A link to the release is near the top of the page. During today's call, we will discuss the expected performance of the company. Such statements constitute forward-looking information within the meaning of the Private Securities Litigation Act. Actual results may differ materially from the projections provided in this call since such projections involve significant risks and uncertainties. A complete disclaimer is included in the press release and is incorporated into this call. We are not responsible for transcripts of this call made by independent third parties. I will now turn the time over to our Chairman and CEO, Harris Simmons.

Thank you Clark. And to all of you welcome to our call this afternoon. This has certainly been a tumultuous period for the industry and for investors. But I think it's useful to remember that the industry's fundamentals remain very strong and that's certainly true at Zions Bancorporation. I think its notable this quarter that net charge-offs remain at levels that are generally well below those of many of our peers that's been helped by strong equity levels and deals by re-margining of many real estate credits, a continued strong performance in our commercial portfolios and by stellar performance in our consumer loan book. At the same time, we've been building loss reserves in a substantial fashion over the course of the past year. Our allowance for loan and lease losses is up over 40% over the past year. While we continue to experience some impairment in our securities portfolio something we'll address at greater length during the call. We believe the potential for likely losses in that portfolio is reasonably well bounded and will be something that continues to be adjustable in the quarters to come. Finally, we recognize that the generation of capital must govern balance sheet growth and you'll see us being more proactive in the second half of this year in managing growth to that end. But we feel quite sanguine about the future that's before us and we appreciate your support. With that I'll turn the call over to our Chief Financial Officer and Vice Chairman, Doyle Arnold to go through the numbers. Doyle?

Thank you, Harris. Good afternoon everyone, I appreciate your interest in the company and its results. My prepared remarks has as with last quarter are going to be rather lengthy today, we've got a lot to go through. So, please bear with me but we will take... ask questions at the end I'm sure. So, first the headlines and then we'll go through page by page some of the detail earnings, applicable to common for the quarter were $69.7 million, or $0.65 a share, which does include the impact of $0.22 per share of impairment losses on securities. Organic loan growth was very, very strong this quarter approximately $1.1 billion, one of the great paradoxes of the current environment is the wide disparity of conditions in our footprint. While loan totals are declining in certain parts of our footprint and in certain categories particularly as we'll discuss residential land acquisition development in the Southwest, there continues to be strong loan demand in Texas, Colorado, Utah, Idaho and the Pacific Northwest. We perhaps did not manage balance sheet growth as tightly as we perhaps should have in the phase of the strong well priced loan demand, but intend to restrict our limit balance sheet growth more in line with capital generation in future quarters. Our core deposit growth remains challenging we did see average core deposit growth of about $300 million with the largest growth being in savings and money market accounts, and some growth in DDA, that's average growth period and this we'll discuss was up a little stronger than that. Net interest margin of 4.18% was down only five basis points from last quarter, primarily due to increased NPAs and reversal of some previous accruals on NPAs. Net interest spread actually increased by 10 basis points reflecting both better loan pricing as well as deposit pricing. Credit, particularly residential land and construction loans continued to weaken during the quarter. It shouldn't surprise anyone. It's been well reported condition of the housing markets. The magnitude of the deterioration was in line with our recent guidance as we continue to build reserves. Non-performing assets increased $263 million to 1.66% of net loans in OREO. Somewhat more than we had forecast at the end of last quarter on their comparable call then, but in line with our recent guidance. Net charge-offs of $67.8 million, or 67 basis points annualized of average loans. Again was an increase from last quarter, but slightly... just slightly better than our most recent guidance of a few weeks ago. Provision for loan losses are $114.2 million, also greater than we forecast at the end of last quarter, and up from the prior quarter. But it was $46 million in excess of charge-offs resulting in an increase in the allowance for loan losses to 1.31% of net loans and leases. We... as I mentioned in the EPS summary, we did recognize impairment losses on securities of $38.8 million pre-tax which was at the low end of our previous guidance. And we will talk more about that at some length later. We also encouraged fair value in non-hedged derivative losses of $19.8 million or $0.11 of share, mainly reflecting the impact of lower spreads between LIBOR and prime. We don't hedge that spread as a part of our interest rate risk management and in the continued turbulent credit markets that spread continues to behave very differently than it has over the past many years. Tangible equity ratio was 5.97% at quarter end, and as you know subsequent to the quarter end, we successfully raised $46.7 million of new Series C non-cumulative preferred stock which on a pro forma basis adds about nine basis points to the tangible equity ratio or raising it to about 6.06%. As we'll discuss in a minute on our pro forma basis, risk based capital measures are flat, roughly flat from the first quarter. In summary, the NIM was relatively stable. The net interest spread was up. Operating costs were well controlled. Credit costs continued to increase driven largely by the same weaknesses in residential housing acquisition development activity in the Southwest that we discussed, and we also continue to build reserves. The 60% of our total franchise located outside of California, Nevada and Arizona performed remarkably well. Although, there is some signs of economic slowing in some of these markets as well. And then again, as I said net earnings were adversely impacted by the non-hedged derivative losses. Now, we are going to turn to the details I would invite you first to turn to the very last page of the release. It's numbered page 23 and it's got some new disclosures in it and I want to call your attention to the bottom half of the page where we review capital ratios, tangible equity ratio declined 6.2%, down to 5.97% on a pro forma basis, 6.06 as discussed. The biggest reason besides the loan growth for that decline our marks that go through OCI, other comprehensive income on our interest rates swaps and fair value marks on the available for sale securities. Those marks are reversed out for purposes of risk based capital calculations. So we've also given you actual as of March 31 and estimated June 30th and estimated pro forma June 30th capital ratios for the key regulatory capital measures. And as you can see, the first one Tier 1 capital sometimes called the leverage ratio is kind of flat to up on a pro forma basis Tier 1 risk based sort of flat to down a few basis points and total capital same flat to down a few basis points. At this stage, there is probably five basis points plus or minus of error maybe a little more in any of these measures but, we know that capital is of keen interest to everybody and so we wanted to get the information out which is in that... will be finalized in the 10-Q in a few weeks, but this is our best estimate at this point in regulatory capital ratios are basically stable. Now, I'd like to comment briefly on the preferred issue, I know there was a lot of noise in the marketplace around that issue and a lot of statements acquisitions, speculation et cetera that we failed in our capital attempt. So I want to set the record straight, at Lehman Brothers sponsored conference in May and again at the Fox-Pitt Kelton sponsored conference on June 17th, I did comment about our willingness to consider a capital raise of perhaps $200 million or $300 million if it were non dilutive and if the terms were otherwise reasonable, in order to support the very strong growth opportunities that we saw and expected to continue to see. At the time those comments were made their was a slight crack open in the retail non-cumulative preferred window, and I think a total of three issues got out. And mid to late May after which shortly within a matter of a couple of days after I made the comments on June 17th however very adverse announcements that have been side of one large investment bank and two large regional banks, basically slammed that. Wall Street led under written retail preferred market the window closed. So we decided to consider using our own retail broker dealer to raise a more modest amount of capital, again they capitalized on opportunities. We had successfully sold over $230 million of senior medium term notes through this channel and fiver or sox auctions raising therefore $40 million-$50 million at a pop in a time when no other regional bank had been able to issue any senior notes for months. We estimated that we can perhaps raise $40 million to $50 million in preferred through this route and then we did in fact conduct what we consider to be a very successful widely understood... misunderstood excuse me issuance. We size the prospectus at a $150 million to enable us to reopen the issue at a later date if the need is there and market conditions are receptive and we may try to do that. And just to put this in perspective every $25 million that we might issue changes essentially all equity ratios by about five basis points. So it's a, that's a possibility to remain for the future. We can also resize that entity if or that issuance if the opportunity is there, and the need arises. So our summary... our thoughts on capital are that all of our banks are very comfortably well capitalized as is the parent. We do not foresee a need to raise capital that is diluted to share account. We'll continue to manage the size of the balance sheet as necessary and add capital to retained up... to retain earnings and opportunistically using our own retail broker dealer again perhaps to raise additional non-dilutive capital. Okay, now some of the operating results of the quarter, page 14 consolidated balance sheet, and page numbers are in the upper left hand corner. Firstly, I'd like to call your attention to as money market instruments interest bearings deposits and commercial paper declined about $740 million, that decline occurred right at the end of the quarter and reflects the fact that when we... as we publicized bought us our own small business securitized loans back from Lockhart, we have seized buying a roughly comparable amount of commercial paper issued by Lockhart. So, the net affect on balance sheet size was roughly neutral but, the reflex, the decline in commercial paper shows up on that line. A couple of lines further down under investment securities. You will note that held-to-maturity securities increased and available-for-sale securities decreased by roughly comparable amounts. We're going to talk more about that later, but we did re-classify early in the quarter a $1.5 million roughly available for sale securities to held-to-maturity, these were largely a bank and insurance trust preferred CDOs. Loans and leases... net loans and leases increased $2 billion, $1.1 billion of that was the organic growth that I had previously mentioned and about $900 million was the net effect of the Lockhart repurchase when MBIA got downgraded that I have also discussed. In the deposit section, user period in balances, I will note that non-interest bearing demand increased $271 million, somewhat more than the average increase of the 80 something million, a lot of this was in commercial or non-personal DDA and I also note that money market accounts period end, the period end grew by $460 million, also a bit more than the average for the quarter. The... let's see, the core deposit growth was spread across the franchise with California Bank and Trust, Amegy Bank and Vectra Bank in Colorado showing, the strongest growth and then weaker core deposit side of Arizona and Nevada. Page 15, the consolidated income statement. I will first note that under interest income, net interest income before provision was essentially flat. The non-interest income, the first five lines or so that are largely recurring were in fact recurring, there is pretty much nothing to comment on, other than continuous stability and moderate growth as a general rule there. Loan sales and servicing income with the purchase of the loans out of Lockhart will decline to a minimal, a rather minimal amount going forward, but the offset to that will be a pickup in net interest income as those loans come onto the balance sheet and we recognize income there. Income from securities conduit is also down reflecting the shrinkage in Lockhart. Fair value and non-hedged derivative income or loss in this case of 19... just under $20 million and I would also say the volatility in that line, if you go back a few quarters, reflects the continuing aberrant behavior of the spread between LIBOR and Prime which shows every indication of continuing to be aberrant and somewhat volatile as we go forward until credit market conditions finally stabilize. Equity securities declined from a gain of $10 million to a loss of $8 million. There is largely remember that the previous quarter had a large diesel related IPO gain and this quarter there was no such gain. And then largely the $8 million is mostly losses on various venture capital investments. And then finally, the impairment losses on investment securities evaluation losses of $38.8 million. Non-interest expense salary and employee benefits declined about $8 million, primarily driven by lower payroll taxes and total non-interest expense has been flat for the year. The other non-interest expense line appears to have increase, but bear in mind that there was $6 million litigation accrual that was reversed related to Visa in the first quarter. So it's the first quarter number that's artificially low rather than this number that for some reason increased. The next page I would like you to turn to is page 17 these are changes and other comprehensive income. Changes on this page bear in mind impact GAAP capital. They... this is changes in capital that have not flowed through earnings and they do not... it does not effect regulatory capital ratios. And the key things that... the key things that flow through here if you're in the third from the right column cumulated other comprehensive income, are net realized and unrealized losses, or gains on investments, and these are essentially the AFS securities. And then unrealized gains or losses on derivative instruments and these are the net changes during the quarter. First quarter the first half of the page and current quarter is the bottom half of the page. Notice that on our interest rates swaps, we had a net pick up to capital of 70... almost $74 million in the first quarter we detracted from that amount by $66 million this quarter. And overall you can see the change of net of all of these things was $82 million if you compare the 158 at the bottom of the page it was $76 million in the middle. A comment on the interest rate risk marks in particular, these marks vary depending upon three to five year swap interest rates. Essentially as rates in that category go up, these marks tend to go on a negative direction as those rates come down, they go on a positive direction. But by definition they converge to zero on each individual swap contract as it comes towards its maturity date. So, this is a...this line in particular can go up and down during the quarter, during the year, but over the life of the contract it converges back to zero. It's not a permanent source of capital accretion or diminution. I'd like you to turn now the page 18. This is a totally new schedule. This gives you a great deal of additional detail on our investment securities portfolio and you can see we've broken it into two parts, held the maturity available for sale, we've showed you that the poor composition and the marks on... and the ratings on all of the securities that we think matter. I will point out that the carrying values in the middle column of numbers of $1.914 billion for held to maturity, and $2.817 billion for available for sale tieback to the balance sheet that we looked... numbers that we looked at earlier. You can see here the trust preferred securities that we move from available for sale to held to maturity, there are one point in amortized cost, $1.376 billion of banking and trust preferred securities that had a... have an OC... accumulated OCI mark of $241 million that has been recognized in capital for a carrying value of 1.34. There's another $159 million of fair value declines that are... will be reported and disclosed, herein are disclosed for FAS 157 purposes but have not then recognized into capital or the income statement. Then you can see the other categories. You can see but by far the bulk of these securities were A, AA, AAA rated and the rest are BB rated. You can also go down and look at the available for sales securities and see that, there's a divisional bank insurance trust preferred, which we noted a lot interest in that categories as well most of this AAA rated, and most of the securities have been previously purchase form Lockhart securities to reduce its needs for commercial paper funding. We bought them on to the balance sheet for that purpose. All of these...excuse me, all of the available for sales securities course to mark-to-market fully every quarter, and that marks goes to the income statement. So, there is no second from the right column there and in the total, the total unrecognized loss pre-tax in all of the securities portfolio, therefore, that has already impacted capital is $355 million, that's the very bottom of the second column from the left. And there is an addition of about a $185 million of declines in value that has not been so recognized, but is here disclosed. We expected for the end of the last quarter and earliest quarter that this... the market for these securities would become highly illiquid and very difficult of value. But we also had done... knew a lot about the quality of the underlying composition of these issues. We taught that the fair values, therefore, would become difficult to obtain and would decline even in the absence of other, of real impairment or loss content or at least well in excess of whatever the ultimate loss might be. We also had the ability and intent to hold on to maturity and as for those reasons to reduce the volatility in capital GAAP capital, and because we had the ability intent that we made this transfer. Some comments on the composition, besides what's here over the ratings, we have gone between the two portfolios. Then we have 1.18... excuse me, $1.8 billion of bank and insurance trust preferred. This consists of 84 unique tranches across 50 different CDO deals with over a 1,000 unique banks underlying obligors. The fair value marks that are disclosed here, are determined primarily using level two methodology. As the market is becoming increasingly frozen up, we expect that we may have to switch to level three for summer or many of these in future quarters as quote said [ph] to do a matrix pricing, it is becoming difficult to obtain. Particularly, non-forced sale kinds of quotes in this market. Of the over a 1,000 banks, 90% have LACE ratings of C or better. LACE stands for liquidity asset capital earnings. It's sort of a publicly available shadow camel rating system, if you will. It's not done by the regulators. It's done by an independent service. But it's sort of based on regulatory use of the world. 97% of these have Texas ratios of below 20%... excuse me, below a 100%, I am sorry, below a 100%. For those of you who aren't familiar that Texas ratio is one, that's a kind of a rule of thumb that became widely used after a number of TexasBanc stresses a decade or so ago and it is the sum of non-performing assets plus 90 days pass due divided by tangible equity, plus loan loss reserves. And the sort of dividing line that a lot observers worry about is 150% and above that Banc is exhibiting lots of stress. So 97% of what we are holding of Texas ratio is below a 100, 93% are below 50%, two-thirds of them were below 10% at the most recent reporting period. Now included in the 24 tranches are five small income notes. These are sort of the residual pieces, if you will. We have been two of these to be OTTI and they are now carried on our books at a fair value of $1.8 million. The total remaining value of all five of the income notes is $3.8 million. I'll also comment that we did have exposure to IndyMac in several tranches in this portfolio. Even though IndyMac did not fail until the second week of the third quarter, we assumed complete default and a 100% loss on IndyMac on our analysis of the portfolio that we are talking about here at the quarter end. If you also may know S&P announced yesterday after markets that it was putting a number of bank truck CDOs on negative watch. We frankly expected some number of those will end up being downgraded. If current market conditions continue, it's likely that we will recognize additional impairment losses over the next several quarters. We expect that they are like to be in the same range, similar to what we have experienced in the last two quarters and aggregate dollar amount, although there maybe some lumpiness there. And we continue to dissect and stress test this portfolio quite regularly. And we believe we understand its loss content and the value of these securities and we've disclosed that fairly. Now credit quality page 19 non-performing assets as previously discussed increased by $263 million to 1.66% of loans as you might expect the increase was concentrated in residential land and development loans mostly in Nevada and Arizona so residential land values continued to decline in those states. There was as well as we've talked about increase NPAs in Zion Banc particularly to residential credits one of which had geology and engineering problems and the other was had exposure in the Southwestern distressed states. For the most part these NPAs are well secured and we do not forecast large increases in net charge-offs to come out of them. And by well secured I mean, well secured on a current fairly recent appraisal kind of basis. Accruing loans past due 90 days or more also increased although, not reported here but loans 30 to 89 days delinquent actually declined meaningfully from the previous quarter. And those numbers will be available on few weeks in the call reports. Net charge offs were $67.8 million or 67 basis points say annualized of average loans, up somewhat from the prior quarter, but still relatively good for the industry today. Level of the actual charge-offs arising out of the non-performing assets has been mitigated by our conservative loan to value ratios in CRE underwriting, a very strong consumer portfolio and the fact that a lot of our portfolios is located in states where the economies are still relatively strong. We continue to build reserves provision for losses as you can see was a $114.2 million and exceeded charge-offs by $46 million. At the end of the quarter, the ratio of allowances to loss... loans and leases increased another five basis points to 1.31%. Over the past year we've had... we've built the allowance by $169 million or a 44% increase even while absorbing at significantly higher charge-offs. Comment on trends is expected... residential acquisition development, construction loans in California, Arizona, Nevada remain the most troubled segment of the portfolio. However, we are somewhat encouraged by the fact that total delinquencies in CRA were essentially flat from the end of the first quarter. As we've mentioned a couple of times recently it increasingly appears that trouble CRE loans in California appear to have stabilized doesn't say there won't be more charge-offs coming out of there its just that the prop... the new problem loan identification is just not there any more. Arizona does continue to experience considerable stress in Nevada probably fall somewhere in between those two segments. And other segments of our portfolio continue to perform relatively well. Total delinquencies in C&I across the entire geography declined during the second quarter. Then finally, let's see, just coming down home stretch guys so bear with me loan composite loan growth composition and the impact of Lockhart kind of go through this piece by piece, you can see on page 20, commercial industrial loans increased about $560 million that was essentially all organic growth. Owner occupied commercial increased about a $1 billion, $747 million of that came from Lockhart. So, loans we had previously made some years ago, securitized put in to Lockhart and they have now come back. Commercial real estate construction land development was down a net of $100 million, it actually declined about $300 million in the three Southwestern states offset by a couple of $100 million of growth in Texas and elsewhere. Commercial real estate term grew about $370 million, $150 million of that also came out of Lockhart. These are again small business real estate secured loans but they are not deemed, owned or occupied. Then I think that's probably, what's worth talking about there. In terms of geography the growth was concentrated primarily in Zions Banc and all of the Lockhart repurchase loans were purchased by Zions Banc. There is also a strong growth in Amegy Bank and Vectra Bank Colorado. The banks in the Pacific Northwest very strongly in percentage terms with of course the dollar amounts are smaller. And then in California and Nevada and Arizona the totals were flat to down slightly. The net interest margin on page 21, bottom of the page, again down five basis points due to non-performers. Just above that you can see the increase from 2.61% to 3.71% in the net interest spread. And finally, comment about Lockhart Funding for those of you keeping score. At year end, Lockhart had $2.1 billion of total assets at June 30th, it had total assets of $862 million with a fair value that was $65 million less than book value. Composition if you want to take notes as, U.S. government and agencies $216 million, AAA rated bank and insurance trust preferred pool $603 million and other AAA and AA rated $43 million for a total of $866. So, that's the detail walk through of the results. I would like to try to best we can give you guidance for the outlook for the next quarter or two to close with that. First a trivial item, as you note at the text of the release, there was an unusual tax benefit of a little over $5 million. For those who of you trying to build earnings models, you may assume a tax, I would suggest you assume a tax rate for the balance of the year at about 33% effective tax rate, 33%. Loan growth. We plan to actively managed balance sheet growth over the next two or three quarters. We expect residential construction and development balances to continue to decline and being increasingly selective on underwriting and conservative on pricing. I think balance sheet growth in the next quarter or two will be significantly smaller than second quarter and that loan growth might be rough order magnitude kind of half the level of the second quarter more like the first. Deposit growth is likely to continue to be modest over the near term, but we do expect some continued growth. Net interest margin, further constraint of balance sheet growth should result in some easing of the margin pressure. The bringing of the Lockhart loans back on to the balance sheet will be a boost to the margin of between 5 and 10 basis points rough estimate. All else being equal, increases in NPA's and there will probably be some continued increase there. We will offset that. As we've noted, we're seeing some improvement, the spreads on new loans and modest growth in core deposits and that is always EDA [ph] balance growth will be one of the single biggest contributors and one of the most difficult to forecast. Best outlook is probably continued relative stability and may be some slight improvement. Credit quality remains a top issue for most in the industry and we are well aware of that. Our best outlook is that conditions will continue to soften in most markets, that residential land and home prices will continue to decline somewhat over the next few quarters, but that the deterioration will not be as rapid as we saw in some markets during the past two quarters. NPAs are likely to further increase although at a slower pace, and best outlook is net charge-offs and provisions are likely to remain roughly near where they were this quarter. And as I said before kind of credit quality in California appears to be stabilizing. Arizona is still weakening and Nevada is somewhere in between and the rest of our markets particularly in relation to the nation as a whole continue to be rather healthy and our banks in these markets continue to perform well. With regard to the securities portfolio as we suggested we are monitoring this portfolio very closely. It's likely that we will continue to see some impairments. Our best estimate is that they will remain within kind of the range of the most recent two quarters and, therefore, be very manageable. We recognize that capital and whose going to have to issue and who isn't may well be the number one issue on the minds of many investors. I point out again, that even with the absorption of the Lockhart related assets, some pretty significant stresses that and negative swings in OCI that affected the GAAP capital ratios. All of the regulatory capital ratios are we think going to be relatively flat this quarter, even after all of that. Fundamental earnings remain pretty strong, even the current levels of provision and securities, impairment charges. All of our banks and the holding company remain comfortably well capitalized by all regulatory standards. The transfer of a large portion of the bank and insurance trust preferred CDO portfolio limits our exposure to short-term declines in the value of these securities due to risk aversion in the liquidity and therefore, cushions to some degree impacts on GAAP capital. By moderating balance sheet growth and perhaps augmenting capital with additional modest issues of preferred stock, we believe we will continue to maintain very healthy capital ratios. And do not see a need to issue capital that has diluted the share count or to change the common dividend. And we remain open to the possibility of issuing larger amounts of non-diluted capital if market conditions and terms are reasonable. And as I have said before, we will do that primarily to take advantage of growth opportunities. With that I will end this soliloquy and we will pause while you organize your questions and we are happy to try to respond. Thank you again for your patience. Question And Answer

[Operator Instructions]. Your first question comes from the line of Steven Alexopoulos with JPMorgan. Please proceed sir.

Hi everyone.

Hello Steve.

Doyle, first question. When we look at down at the unrealized loss column, the new disclosure and the securities book.

Yes.

Can you give us a sense what's the amount that you consider to be a risk and you are talking about permanent impairment we could see over the next couple of quarters, not the amount of the impairment, what's the total amount of securities at risk was at?

You mean the current carrying value of the securities or just the loss that we --

Yes, yes, because we are looking at several categories within trust preferred in some of these line items. I was wondering you can just pull together like what, what is that risk of permanent impairment here over the next couple of quarters?

Well that it is probably most of it, I think the lower rated things, the BBBs have more risk of that than the As, AAs and AAAs. So as you can see the BBB numbers there are, you can, I mean you can add them up and so we haven't actually tried to say what are the dollar value of the... face value of the securities that will fall, what we have stressed to it indicated that, we might see OTTI or impairments of kind of in that aggregate to similar kinds of levels that we have shown in the last couple of quarters, going out several more quarters. So if you extrapolate that, if you had $30 million, $40 million a quarter, you can get to numbers that are $100 million of loss over a few quarters and I'm not saying that can be even, but we've got 84 different issues in here. And they will, if those would become stress, we will do so one at a time and it's relatively... there's no one issue that is $400 million or $500 million of the $1.05 billion. They are all kind of we most of what we own are in the $40... $20 to $60 million per security kinds of buckets.

That's actually helpful. Yes.

Okay.

When we look at the residential construction book including land what was the balance of that at the end of the quarter?

Residential only as opposed to what we put on the schedule?

Yes.

Which was do you have that [Multiple Speakers] give us a minute while we're flip through the binder.

And then the follow up to that was what portion of those were in non-accrual at the end of the quarter?

The answer to the first question is --

$3.472 billion.

$3.472 billion is residential land acquisition development.

And Harry what percent of that is in non-accrual?

What percent of that is in non-accrual... that I don't know I would say... I'll give you this I think in Arizona and Nevada and California those portions are probably 30% to 50% now credibly [ph] to criticize the class by amounts were 30% to 50% it's a lot smaller that dampens on non-accrual. I'd say most of the... lets see back into another way Jerry if you just subtract the out for two large ones there in Utah and kind of an estimate of the other stuff from the total. You probably get to.

And I dare say I mean total non-accrual loans were $569 million roughly and probably $475 million something like that.

Is residential?.

Residential, I would guess.

Okay and

Not much outside of the residential land acquisition development category and a little bit in the owner occupied, probably that... it's not much. I am sorry we just don't have a specific number.

No that's helpful thanks guys.

Thanks.

Your next question comes from the line of James Abbot with FBR. Please proceed.

Hello James. James Abbot - Friedman Billings Ramsey & Co.: Good evening. Wondered if you could touch on the subordination levels of the different tranches of bank trust preferreds and walk us through what it would take for I understand as the rating agencies may change the rating and would cause an OTTI but I'm more concerned I guess about the cash flow impairment and how much subordination is there at within some of those BBBs and single As so forth.

First I wanted to correct something here, a rating does not cause OTTI, I mean the rating agencies lowering rating on a security does not cause OTTI only the not receiving the cash flow will get you to OTTI has been like a [Multiple Speakers]

Or expecting that we won't receive the cash flows in a timely manner in fact we've OTTI some securities that by your definition would not have been if we were just looking at the ratings.

One of the securities we OTTI this quarter has a double AA plus rating from S&P today.

So there levels of subordination range from in the worst case mid to low single digits in the high... in the best case well above 30%. There is I believe no security in which it would take at least on average two to three more bank failures in that pool to cause an impairment of our collateral level. So... and to put it in perspective we had taking into account in this evaluation that we've done here. We had 22 individual bank names out of the 1,000 50ish that were deferring or defaulted at quarter end. So about 2.2% or there about are at that level. I don't know if there is any other comment you want to make Harris about.

I might just talk a little about one of that we've stressed test this in a couple of different ways, and this might be useful to know. If you take... we talked earlier about this Texas ratio another word is non-performing assets basically divided by equity plus loss reserves. If you take all of the underlying banks that have a Texas ratio of 90% and above and assume that all of those... all of the securities from those banks are, have a value of zero and if you assume that banks with the Texas ratios of 50% to 90% have a value of let's say I think we used 50% and everything else is okay. That's where we get to the idea that over the course of kind of the next year you could have a cumulative amount of loss similar to what we've seen over the last kind of quarter or so.

We just project that amount forward.

Its annualized. That's how we get to that number and that's... I think that's the most useful way to think about this because subordination levels don't mean much if you don't have much in a particular security. Really the only way to make any sense of it is to model this out and apply probabilities of default and loss given default in light of subordination levels in each of the individual securities and that's what we've done. And fortunately with bank trust preferred securities you actually have the luxury of a lot of public data, should we call it reports that's reasonably current within the last three months and it gives you a lot of data with which to make those kinds of judgments so that's how we've gone about trying to stress test this.

Okay, and having done we're... to be very candid we're aware of some other rumors floating around out there that we have a 50% loss exposure on $2 billion of these securities. We can't get to anything close to that number.

Short of something worse in the great depression and I... most people are saying that this isn't going to get that bad and if you look at the FDIC's trouble bank list, which is currently with the Chairman of the FDIC says that 90 banks, it was 1,500 back in 1990, it'll get worse than 90, I'm sure of that.

Worse than 90 banks.

Yes worse than 90 banks. I'm sorry, but its... we think by stressing this again at kind of a 100% loss on those that get over 90% Texas ratio and watching that, we'll keep applying that, but that's how we're kind of watching this in light sort of outset that we think it remains a reasonably digestable kind of an issue for us. James Abbot - Friedman Billings Ramsey & Co.: Okay, that's very helpful. A quick follow up well I got you on the real estate owned category. There was a big jump there, just wondering if I could understand what was taking place there, was there a timing issue that allowed that to happen that way, was the... tell us, take us to why that jump is quite so much?

Other real estate owned, why did they jump? James Abbot - Friedman Billings Ramsey & Co.: Yes.

Because we completed foreclosures on number of properties that were distressed in Arizona in particular and a little bit in some other areas. I think the other important thing to note is that, I think they foreclosed on a total of 52 properties in Arizona so far this year. And they've disposed of 13 or 15 of those and have another 20 some odd in the process of resolution. So we're continuing to work through those numbers. Go ahead and speak up Jerry.

Yes there was one big... there was one large win in Utah Doyle that would be added to that. So its primarily Utah and Arizona.

That's the one Jerry is referring to as the one I described as having geology and infrastructure, soil engineering kinds of problems that was 25 million of that jump.

17 million.

17 million of the jump. James Abbot - Friedman Billings Ramsey & Co.: All right. Okay, thank you very much.

Thank you.

Your next question comes from the line of Brian Foran with Goldman Sachs. Please proceed.

Brian? Brian you must be speechless. So, because we beg to defer. I'm sorry, I guess we need to go on to the next question.

All right. Your next question comes from the line of Tony Davis with Stifel Nicolaus. Please proceed sir.

Jerry if you are there I wish you could give us little color call on the residential instruction loans that you are sitting on today. How much have been written down in terms of the original loan book and what do you have right now allocated in reserves to those loans as a percent of original?

As a percent of the original amount,

Right.

I don't have those numbers in front me. We can only... are reserving on substandard credits, we are reserving 10% to 12% and of the majority of the loans that are included in our credit size, classified assets are made of residential subdivisions and some land and development. That's... those are the primary components.

Okay. I think, it's fair to say though I mean most of the net charge-offs that you've seen here in the last 12 months have been in the residential development and construction portfolio. And so, you just kind of cumulate those numbers. That's essentially what has been --

Okay.

It was down, but also have to know that lot of these deals have, they were earlier staged deals before land values, rose that will have very strong sponsors or lot of equity. You simply can't apply a broad rush to the loan portfolio.

During the last quarter about 40% of our charge downs were residential based loans.

Okay, and I wonder, Jerry too, if you could, if you have this on... the breakdown geographically, maybe of the NPAs, say in California or Arizona or Nevada today?

How much of the total NPAs are in those three states?

Right.

It's a pretty high percentage. Or do you want it state by state?

State by state.

Oh, well.

If you give us some... why don't... come back to me.

Let's go on to next question. We will be looking that up and we will provide --

Try to give you that answer.

Thank you.

All right, operator we will take the next question now.

Okay, and again your next question comes from Brian Foran with Goldman Sachs.

Hey, guys how are you?

Fine Brian, how are you?

Good. I guess, can you talk about the movement of the securities to held-to-maturity and what drove that decision. I know you talked about them being hard to value, but I guess we haven't seen that at other banks and if you are going to move anymore to held-to-maturity going forward?

Well I thought I covered that very thoroughly. I am sorry you missed it. So, I'll repeat. I apologize to the rest of you. We did think that this would be... that these securities would become increasingly illiquid, as concerns about banks stresses and bank failures amounted. That approach would become much more difficult to obtain and if they would, even if we ever intended to sell them which we had not, we really thought we would... we are buying them as an investment that they would become very hard to sell. They also.... because in AFS securities, the evaluation marks go through GAAP capital through OCI. We thought that as those stresses mounted, those valuations marks were likely to deteriorate sharply and deteriorate far more than the underlying quality of the issues themselves after we had looked at the underlying quality of the issues, both when we bought them and when we made the decision, that moved them to held-to-maturity. We therefore, thought that they would become a source of speculation that we would have to raise capital, because the OCI marks would become very negative on these securities and we wanted to avoid that artificial pressure. So we transferred them to held-to-maturity that has the affect of freezing in place, the OCI mark, in OCI on those securities at that date. And that OCI mark then accretes back over the remaining life of the security. So long as the security does not go OTTI. Any future changes in valuation in the security that are not permanent, then go, are disclosed as we have here pursuant to FAS 157 but do not affect capital or earnings again unless the security goes OTTI. For any security that does, it might be deemed in the future to be OTTI, we recognized then the full fair value mark both that which is in OCI and then either does not through income at the time take the loss to the income statement and then back out that piece of OCI. And that's purely, and simply why we did it. We embedded it our bank regulators and with our external auditors, prior to taking that decision to make sure that we fully understood the appropriateness in the accounting treatment and regulatory treatment of it. So I hope that's helpful.

That is, if apologize if I missed, so repeat. So just an --

Just one other comment here. If you actually go and look at FASB 115, which I wouldencourage you to do which is in fact the FASB that is operative here. You'll find that in FASB 115, it says that if the conditions change after a security is purchased and certainly if the intent changes, it's appropriate and desirable for a bank to move the securities from available for sale to held to maturity. So what we did is clearly within the intent of FASB 115, and our auditors of course agree with that.

Okay got it and just so in matching up your tangible common ratio to peers, so I should on the 55 this quarter, rather than if I got my math right the 525 if I include this kind of held to maturity OCI and that's the ratio that will be focused on going forward?

Well 55, I guess he's subtracting the perpetual preferred.

Yes. Sorry just...in stacking you up against peers just on tangible comment?

Okay. You simply back out the effect of $240 million of perpetual preferred from the tangible equity ratio which we disclosed at as being a 5.97% or 6.06 pro forma. That's correct.

Okay. Thanks guys.

Before we take the next question operator, we have the answer I think to the previous one, Gerry?

The total amount of non-accrual loans that we have are $570 million. A break down on that by bank is as follows $176 million in the UTAH, Idaho bank, about one-third of that amount is one credit that Doyle has previously mentioned, $92 million in California, $37 million in Texas and $122 million in Arizona, $126 million in Nevada and $16 million in Colorado.

And, that's not the answer...or the answer of the question you though you're asking jump back on and get back in the queue and we'll take another stab, but hopefully that addresses your question. Okay next question, moderator.

Your next question comes from the line of Kenneth Usdin with Banc of America Securities. Please proceed.

Hi Ken.

Hi, Doyle, How are you doing, hi good [indiscernible].

Okay, the remaining $862 million of securities in Lockhart, so I've describe the composition of them. There are no more, none of those securities is susceptible to the event that occurred this quarter, where they were rated...where they had an MBIA wrap. They were all loans that had been securitized. MBIA gets down graded below AA minus and then we hope that triggers the liquidity agreement, we buy them out. They come back as loans. There are no more such securities, so the rest of the stuff that's in there can only come out for two reasons. Its not -- we don't have he discretion, again because QSPE is supposed to be -- to use the apt term of bring debt entity; we don't have the discretion to decide, to go reach in and pull securities out of there. So the bank and bank trust prefers that are AAA or the other asset... the other securities that are AAA and AA. If, and as, any issue, any one issue were to be down rated below AA minus, that particular issue would be bought out under the liquidity agreement at it's then carrying interim value and brought back on to our balance sheet at fair value and the difference for that security, if any, would be recognized as a lost of income. Of course the governments and agencies, we don't think are probably susceptible to that downgrade, I haven't heard of speculation that U.S. government is about to go below AA minus. But that's the way it would work, the only other event that could trigger besides a downgrade it was specific security would be a failure of Lockhart to sell all of its commercial paper which I would deem to be reasonably unlikely at this point but, it could happen. The finally, there has been a lot of speculation, well it's not speculation I think the SEC has asked the FASB to do a thorough re-look at the accounting rules governing this entity and all the commentary and direction that I get indicates that there is a strong bias towards somehow or another eliminating these things by the end of 2009 not the end of... or may be 2010 I haven't heard anybody though postulate something earlier than 2009. So, the likelihood is it sort of stays in this reduced form and slowly decreases as normal pay offs occur and occasionally as a security might be downgraded.

And on that point Doyle, can you give us any sense of what the... whether or not the AAA trust preferreds that are remaining in the conduit have a... I don't know I guess a similar loss content potential as the ones that you described earlier that are on the balance sheet.

Well there are I say, I said I think the AAA stuff that's on the balance sheet and AAA stuff here would be somewhat similar in character and they are AAA. So the lost content in these a whole lot smaller than say the BBB's we would think but again a downgrade and I don't... and as I said here I don't know whether any of these securities were among those put on outlook by S&P last night. David's saying he doesn't think so. David E. Blackford - EVP, CEO of California Bank & Trust: I don't know.

Ohno, he is saying he doesn't know either. But if one of them were downgraded at the end of this outlook period or whatever below AA minus we would have to buy that security out

Okay, my second question just relates to loans loss reserving and the allowance more generally speaking granted with the pretty big spike in NPAs as you have discussed and also in past dues, the reserve only built by a little bit this quarter and you did speak to obviously the reserve in provisions kind of remaining adequate or remaining elevated, I should say so. Can you just walk us through... you referred to the types of content and the types of geographies that some of your... that a good portion of your loans are into it just seemed that perhaps the reserve looks a little likes still versus peers there, can you just help us come through with your reserve adequacy and whether or not you get to really have to continue to build the reserve from here?

Well, I would offer several comments and then Jerry may have more. One is that we have indicated we do expect to continue to build the reserve for in the next few quarters. Second, as even as these publicly disclosed things non-performing levels and so forth have increased the provisions that we have made in excess of losses have pushed us up steadily within the calculated reserve range that comes out of our reserving process. If you go back a few quarters we were a little above the mid point, we're now well up in the upper quartile of that range pushing up toward the high end of the range. And that my third comment would be on, every time we get a lot of these non-performing assets are secured. There is this collateral behind them. We reappraised that collateral in some cases three times, lot of it more than once, over the last year as it's continuing to be and we have taken charge-offs, if and as appropriate as those collateral values have come down and when we take a charge-off, we... for those reasons we typically bring it down to 88% of appraised value to allow for further costs of disposition and decline and so forth. So, we've taken charge-downs as it's occurred. The appraisals on the distressed properties are pretty current and so that's why we feel comfortable that the reserve is adequate.

I might also additional, I think one of the things notable about our portfolio, we have a reasonably low percentage, and it's become increasingly smaller, of our total portfolio is in consumer and residential mortgage loans. It's about 16.7%, 17% or something of the portfolio currently. And so as compared to some banks, where they, that portfolio never showed the problems in that, and our consumer portfolio never shows it's non-performing assets. They get out six months, they get charged-off and so I mean, one other things I would encourage you to think about comparisons is the fact that a larger portion of our problem loans are going to show in non-performing and sometimes we would simply take amount of charge-offs and consequently, I think I do think it's useful to look at net charge-off numbers as well because it's... I guess, the other thing I would say about the consumer portfolio is, we do have... it's performing exceptionally well and so, that relieves some load on reserve and then changes the comparison, I think in terms of NPA ratios.

Okay, great thanks very much, [indiscernible].

Okay.

Your next question comes from the line of Brian Klock with KBW, please proceed. Brian Klock - Keefe, Bruyette & Woods, Inc: Good Afternoon.

Well Brain. Brian Klock - Keefe, Bruyette & Woods, Inc: Just a couple of quick questions, in the non-performing asset schedule, and I know Doyle mentioned this earlier, I am sorry, to someone else at this, but you talked about the increase in the 90 days past due, did you give a sort of breakout of what type of collateral or loan type that increase was at $24 million?

It would been a mixture of both C&I and CRE with the performance of being in the commercial real estate. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay, Gerry. So that CRE, the residential construction component of CRE that terms?

Yes, residential side of it. Thank you, as far as the commercial side of CRE, we are seeing very little increase in delinquencies and classifieds in that segment. So, it's primarily residential.

And that would apply both for the construction, commercial construction and the commercial term for that portfolio. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay.

We are not seeing stresses of any particular note there. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay. And earlier you mentioned that with the movement into ORE [ph] in the second quarter a lot of that related to the Arizona properties that were distressed and foreclosed and I think you mentioned that there were 13 or 15 properties that have been disposed so far in 2008?

Yes, I had an email of that and I'm not sure I brought it with me. It's come out in the, and one of the larger properties that we have there, it's contract and should close in August. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay, I mean would you know off the top of your head, what sort of loss severity you might have seen on the sale and disposal of these properties in Arizona?

We've got... it's very near to carrying value. The losses that were realizing debt on these disposition so far and ones that are under contract are aggregate to less than a million up and less than a million down, as I remember the report I had. Brian Klock - Keefe, Bruyette & Woods, Inc: Not much for answer, though.

Which is another indication that would be supportive of my previous point, that we're caring these properties for something that's beginning to approximate realizable value, that we are not falling behind the game. And I would make the same statement, I know in California. We've disposed a lot of property recently at small gains to small losses.

On a corporate level, the net loss in sale of other real state owned has been less than million dollars. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay.

Year-to-date. Brian Klock - Keefe, Bruyette & Woods, Inc: Year-to-date, sure, right. And I guess if... what was the caring value I guess as a percentage of the original note value after charging up and putting a reserve against it and then disposing?

It's almost a meaningless answer because in lot of these cases you made a commitment years ago, property appreciated in value, you advanced, part lots were sold... part of the lots of loan was prepaid in an accelerated basis. And then they got into stress, maybe started, it's almost an impossible question to answer in any meaningful way. I'm sorry. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay. Okay, no problem. And just three more quick questions, within the recovery line there were $7.6 million of recoveries in second quarter, anything material in there and was it commercial or what was the decline look like? The majority of the recoveries were on commercial... on real estate properties. And it's really a multiple number of properties. I don't remember any singular large recovery. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay. And then I guess the net charge-offs, of about $68 million, you mentioned about 40% of those were residential based loans?

In the quarter number, yes. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay. And again geography is that largely in doing those same markets of Nevada, Arizona?

Primarily California, Arizona, and Nevada. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay.

And some in Utah.

Thecouple in Utah we talked about. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay. So I guess with the RAC [ph] the other 60% of the charge-offs, which you talked about having not seeing any thing contagion in the commercial, maybe you can give color on what the other 60% of the charge-offs in the second quarter?

Some of it were been in

In the consumer portfolio. And also but the majority of it would have been in your E&I [ph] portfolio. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay. And when you say consumers, any of that in home equity portfolio?

No. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay.

Our delinquency on the home equity portfolio, as it was $1.750 billion portfolio. The delinquency was 0.22% at the end of June.

That's fair. 30 day delinquency.

30 day plus delinquency. Brian Klock - Keefe, Bruyette & Woods, Inc: 30 days plus, okay, great.

39 individuals' loans of portfolio. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay. So that was obviously the credit is holding up pretty soundly in that portfolio.

Correct. Sure.

And I guess just one last question, modeling why the... Doyle, you mentioned the operating expense has been pretty flat.

Yes.

Linked quarter, personnel expenses were down, is that sort of the seasonal impact, highly compensated FICO Food during the first quarter.

Yes. It's mostly the payroll tax, soft security stuff, that is seasonal, yes. Brian Klock - Keefe, Bruyette & Woods, Inc: And is there any reduction headcount in there too or --

Not meaningful. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay. And so the planned good run rate for the second half of the year looking at second quarter?

I guess the one other contributing factor that it would been smaller than the FICO was that we did further reduce by a modest amount, some of the remaining accruals for long-term incentive compensation. I guess, you can guess why that might be the case. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay.

So, I would guess that for the rest of this year that number may grow at a low single-digit rate, percentage rate annualized as just normal pay increases so forth. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay. And the other... you talked about the other with the variance of these litigation accrual reversed on the prior quarter.

Yes. Brian Klock - Keefe, Bruyette & Woods, Inc: Probably a little bit of or ORE type expenses that actually contributed to that being little higher linked quarter, if you normalize that.

I guess there could be a little bit it in there.

Nothing material, Okay Brian Klock - Keefe, Bruyette & Woods, Inc: Nothing material, okay.

Doyle'skind of flipping through some pages to see... if we change, why don't we go onto the next question. If we want to modify that statement, we'll do it before the call is over. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay. Andjust my last question and I'll get off. So, I guess the last thing on Lockhart, I think we're been beating up pretty good. I guess the other thing is with Lockhart how much commercial paper was able to roll on the second quarter, and how much they have coming up to roll here in the second half of '08?

Well, it's... all the commercial paper they are selling is very short-term. Overnight say 30 days for the most part, with most of it being a weaker lasso. Its mostly rolling almost daily. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay.

We...of the $860 million at quarter end I would get, it's a rough about half of that was held on our balance sheet. Our banks have bought it and about half of that was sold to market place, our traditional buyers of that paper and it rolls pretty frequently.

And the total...total other real state expense in operating expense is a $1,290,000 million in overall sales. Brian Klock - Keefe, Bruyette & Woods, Inc: Okay great. Thanks guys. I appreciate it.

You bet.

Your next question comes from the line of Greg Ketron with Citigroup. Please proceed.

Hello Greg.

Good afternoon. Just a couple of questions. One, the large geological credit that you had mentioned. Is their any amount of charge offs from that projects that's included in that charge offs this quarter-to-quarter.

Yes, there was $10.7 million.

10.7 million, so, if you were to exclude that credit then your net charge offs levels are quite a bit less?

Yes, they would be pretty similar to last quarter, yes $3 million or $4 million, I guess that was, yeah that was a big chunk.

Okay. And going forward regarding that project is that pretty much now held on the books. What do you think is the net realizable value, or do you anticipate any further forecast of that credit?

We believe so.

Okay.

The value again was 17 and seven piece.

On the books is 17.

So, it basically took what is that amount to 30 or 40% breakdown on it.

Okay. And Doyle you had presented later in June a loan to value comparison where you'd refreshed the loan-to-values on loan acquisition development at Lockland's?

Yes. I did for three states I think.

Yes. It was three states and I think for Federal Zion's it was 69% refreshed loan-to-value. Would that be the way to think about that is that the loan-to-value that you hold this loans in the portfolio today with that be more reflective of value their holding on these loans in the non accrual lend portfolio.

No, the ones that are in non-accrual are probably higher than that. The non-stressed ones are probably lower. Again to refresh your memory typically we appraise the property when the loan is originated, when it renewed, or when we're looking at downgrading it and we have to go out and get a new appraisal because of that and so the loan-to-values in the markets that are not under stress, that are performing well and kind of paying them in the ordinary course etc, those appraisals are included in those averages and they are probably better they're probably better than the average LTV. So the reason I broke out those three states separately was try to address questions, that you and others were raising about...okay in these stress market what kind of declines are you seeing, how much stress is there, so though what I just disclosed in there was in that approx June 17 presentation for those who might be interested looking it up and in the three banks of all the properties that all of the residential land acquisitions development, loans that we have re-appraised in the last six months, what were the LTV's on the result at the end of the appraisal. So, in the fact that those are higher than in some cases than they are on other markets, I think reflects what I just tried to describe it. Does that make sense?

Yeah that's still would imply you have quite a bit of cushion from a loan-to-value perspective if you have problems with these loans from a...from a severity of loss stand point?

Well and again in bearing mind if your appraisal comes in lower and such that the loan balances is in jeopardy, we charge a loan down to then about 88% of the appraised amount right then and there, a 12% cut is taken.

Okay.

So, in theory on any current appraisal the maximum resulting LTV is going to be 88% not a 100 or something higher.

Okay. And final a question regarding the CDO's. Because the bank goes in deferral that doesn't necessarily trigger their OTTI doesn't, they still have like a five-year or longer period in deferral before it may approach that situation?

Well it depends, bear in mind that each of these issues that we have probably has an average of... has 40 to 60 different underlying names in the CDO and the amount of collateral cushion we have in any particular tranche that we own will vary depending upon which slice of the CDO we own. And so a bank... certainly a bank defaulting, as I say like IndyMac being taken over and seized by the FDIC. The likely result of that is a very severe loss up to and including a 100% on that particular piece of that particular tranche and if you have enough of those that reach through the all of the collateral beneath us, then it begins to impair the total value of the security. At bank deferring, is not... down there doesn't necessarily create a loss, but certainly it's an indication of stress and if they can't write the shift, that bank may be headed for the FDIC's graveyard down the road.

I think it's safe to say any bank that's deferring payments is something we would look at pretty carefully to understand why kind of the presumption is, it's got a problem and we won't understand that before we've not OTTI it.

May be, that's not, I didn't answer the question you were trying to ask so. But try again, if I didn't.

No, that was it, I just trying to get better understanding of have a deferral process, because as we work our way through this, you certainly would expect to see more tax in deferral, but that doesn't necessarily result an OTTI, so I was just trying to get understanding of that sort of relationship.

Not a single, one not, you know it takes accumulation of some number of deferrals and defaults generally there. And on the... generally speaking on those that are rated BBB, that slice is going to be a little more junior than As, and the AAAs and, therefore, it will take less defaults to start to impair the value of that security.

Okay, great, well. Thank you.

Okay.

Your next question comes from the line of Jo Morford with RBC Capital Markets. Please proceed.

Hello Jo.

Hey Doyle just briefly, I was kind of curious, that the nature and extent of the C&I deterioration you are seeing in Utah, and maybe why you are seeing in that market and not others?

I am going to let Jerry, if he wants to take a swipe at that one. I think you all know Jerry, our Chief Credit Officer.

Utah is not the only place where we are seeing it at and it's a result of a number of factors we are seeing in some of the markets, we are seeing it because of related businesses that are related to the C&I industry.

The residential construction.

Right.

Primarily residential construction. Excuse me, thank you.

Flummers and

Roofers [ph] and things like that. Some of the things that we are seeing, we would attain to management and the ability to manage the businesses in today's economic environment. We are seeing some of the items, coming up because the consumers are buying less as and so it's impacting sales on some of the retail type establishments. So it's a variety of reasons.

Okay fair enough, thanks so much.

All right.

Your next question comes from line of Heather Wolf with Merrill Lynch. Please proceed. Heather Wolf - Merrill Lynch & Co.: Hi, there. Most of my questions have been answered, but just one quick question, I think you said that $475 million of the non-performing loans for ready construction which leads about another 100 for other products. Did you guys indicate what that's comprised of?

That was sort of guesstimate. But there are no large single, major non-residential non-accrual loans in that list. Heather Wolf - Merrill Lynch & Co.: So, it's really spread across income producing in C&I.

The other 100 is yes.

There is no cats and dogs.

Nothing there of particular note. Heather Wolf - Merrill Lynch & Co.: Okay, all right great thanks a lot.

You bet, Heather. Thank you.

This concludes the question-and-answer portion of today's call. I would like to turn the call back to Mr. Hinckley for closing the month.

Thank you very much for being patient with us.

Hi, this is Doyle. I would like to second that. I know it's down past 7 o'clock back east where many of you are. Really appreciate your attention and your interest. Hopefully couple of quarters down the road, we'll have simpler calls to get through, I'm afraid they may stay complicated for a little while longer. But as my friend Rene Jones at M&T Bank said in concluding his call, I think that we're just slogging through it, and it's working our way through these issues one by one. And I think we're knocking them down as they come up. So we look forward to talking with you again, in October I guess is the next time we'll chat and I will see some of you at conferences between now and then, again thanks so much.

Thank you all.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.