Zions Bancorporation Q3 2008 Earnings Call Transcript

Oct.19.08 | About: Zions Bancorporation (ZION)

Zions Bancorporation (NASDAQ:ZION)

Q3 2008 Earnings Call

October 16, 2008 5:30 pm ET

Executives

Clark Hinckley - Sr. VP of IR

Harris Simmons - President & CEO

Doyle Arnold – CFO

Gerald J. Dent - EVP, Credit Administration

David Blackford – EVP, CEO California Bank & Trust

Janine Flynn

Keith Maio - President and CEO of National Bank of Arizona

Analysts

Ken Zerbe – Morgan Stanley

Steven Alexopoulos - JP Morgan

Greg Ketron - Citigroup

Jennifer Demba – SunTrust Robinson Humphrey

Brian Klock - Keefe, Bruyette & Woods

Anthony Davis - Stifel Nicolaus

Kenneth Usdin - Banc of America Securities

Heather Wolf - Merrill Lynch

Edward Timmons – Stern Agee

James Abbot - Friedman Billings Ramsey

Joseph Morford - RBC Capital Markets

Todd Hagerman – Credit Suisse

Operator

Good day ladies and gentlemen and welcome to the third quarter 2008 Zions Bancorporation earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Clark Hinckley, Senior Vice President, Investor Relations; please proceed sir.

Clark Hinckley

Good evening everybody and thank you for joining us for this quarterly conference call on October 16, 2008. During this call we will reference 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 at 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.

Harris Simmons

Thank you very Clark and welcome to all of you. This has obviously been a rather extraordinary quarter in the world. We had a quarter that was marked by several significant internal events. We strengthened both our GAAP and regulatory capital ratios with GAAP capital ratios that now are at their highest level in three years.

This was done with a combination of very careful balance sheet management combined with raising new capital in some innovative ways that enabled us to raise nearly $300 million of new capital which is in line with our guidance and done at rates and terms that I think were quite favorable compared to the market.

We also continued to build our reserve levels in the face of a still very uncertain economic environment. I think its clear that as this quarter has unfolded that the uncertainty around what the national economy and the economies of the markets that we operate in will look like over the course of the next several quarters is probably less certain then it had been earlier in the year.

Consequently we’ve pulled our reserve to a point that it is now 46% higher then it was a year ago, an increase over the past year of $191 million in our loan loss reserve and that trend continued this quarter.

We bolstered our core deposits by acquiring the insured deposits of the failed Silver State Bank in Las Vegas with a few locations also over in Phoenix. We reduced our reliance on outside funding; our short-term borrowings at the Federal Home Loan Bank system for example came down from a peak of about $6.8 billion earlier in the year, to $3.8 billion at quarter end insuring that we have ample liquidity for any unforeseen needs.

So we have a lot of capacity at the home loan system as well as at the Fed. Not surprisingly there is a lot of noise in this quarter’s results as financial markets were win a state of real disarray and inter bank funding rates gyrated wildly and you’ll see some effects in our numbers particularly from the spike up in the LIBOR rate and the way that’s effected some non-hedged derivative basis swaps that we have.

But it’s also effecting relationships between the prime rate and some of our deposit costs and we’ll talk more about that during the call. Credit continued to weaken as we moved through this down cycle and real estate we continue to deal with that.

Our 2007 Annual Report carried the title Successfully Navigating A Challenging Landscape and as it turns out this has been a more challenging landscape then I think most of us ever saw. The landscape is also changing in ways that were almost unimaginable just a few months ago.

We have avoided some of the industries biggest problems including subprime mortgage lending and high loan to value home equity credit lines but we’re not immune to residential development and construction problems nor are immune to the broader impact of a slowing economy.

While our net earnings showed the impact of these increased economic pressures, our core business remains remarkably strong and in the midst of this turmoil we successfully fortified and continue to strengthen the balance sheet to prepare for whatever the future may hold and take advantage of opportunities that we expect will come our way and we do think there will be some in the course of the next several quarters.

I think its also worth noting that we have been recognized recently for doing what we think we do best even in these very challenging times and that’s just good solid basic banking. US Banker Magazine ranked Zions Bank as having the second best team of women bankers in the industry. We are very proud of these talented and dedicated employees. They and their colleagues remind us that even as they face the environment, being energetic and honest and doing the right thing for customers is the key to long-term success.

We are also very pleased that Greenwich Associates, well known and respected research firm which measures customer loyalty and commitment recently awarded Zions Bancorporation its coveted excellence in middle market banking award. We were one of a small handful of national winners winning that award both in overall satisfaction and in treasury management, an area in which we are making a lot of inroads and strengthening our product offering.

With that brief introduction I’ll now ask Doyle Arnold, our Chief Financial Officer to review the quarterly performance.

Doyle Arnold

Thank you Harris, good afternoon, good evening everyone. In summary we earned $33.4 million or $0.31 per share applicable to common for the quarter. That’s within a rather wide range of estimates for the quarter but certainly below the median or midpoint of that range. I think in terms of the major drivers of performance in which we give guidance I think loan growth which was flat was as well controlled or better then we guided toward.

The margin was down just slightly about what we guided toward. The OTTI impairment on CEOs was slightly better then probably we guided toward but credit costs were higher then guidance as Harris mentioned we, as the quarter went on we further strengthened the provision as the real and potential deterioration in the economic climate continued to show its face.

And then also the non-hedged derivative income line about which I’ll talk a lot was much worse then you might have expected for reasons I’ll explain that is not a recurring number but it probably did detract $0.15 a share at least from earnings this quarter. You can make your own judgment after I discuss.

As Harris mentioned capital ratios were bolstered by the capital issuances and we did acquire a failed bank which, in Nevada, the deposits of a failed bank from the FDIC that bolstered the deposit numbers.

What I’d like to do now as always is walk through some of the individual line items on the various schedules that accompany the press release that I believe you all should have and I will start with page 13, the period end consolidated balance sheets and point out a few highlights on that page.

In the loan section about the middle quartile of the page, you can see that prior to provision loan growth was essentially flat within about $4 million of being flat. We indicated that after a very robust second quarter we were going to have to clamp down on that number very strongly to conserve capital and reduce stress on funding and we did so.

That’s good news for us and bad news for the economy and clearly one of, the fact that a lot of banks are taking these kinds of actions is one of the things driving the Treasury’s and Fed’s recent macro moves.

There was loan growth in Amegy Bank, Vectra Bank and our Pacific Northwest banks but this was offset by some loan sales in Utah, and shrinkage in the residential real estate construction and development loans in the southwestern markets due to both charge-downs and pay downs.

The total assets in the middle of the page actually declined about $657 million reflecting some securities pay downs, the flat loan growth and other measures. So the balance sheet actually shrank during the quarter.

Moving now to the liabilities and shareholders equity sections under deposits, you’ll note that period end non interest bearing demand declined about $320 million although, on the average balance sheet pages you can see that it average non interest bearing deposit accounts were up about $130 million.

The core deposits as noted in the text increased by about $800 million, a significant portion of that core deposit growth was result of our acquisition of deposits from the failed Silver State Bank, mostly in Nevada with a bit of it in Arizona.

We paid down wholesale borrowings of various kinds during the quarter both using those increased deposits and another source which I’ll mention in a moment Fed funds purchased as you can see declined $1.2 billion, repo agreements declined $276 million, commercial paper was down not quite $100 million, federal home loan bank and fed auction borrowings declined $340 million. They actually ran up significantly early in the quarter and then came back down to be slightly less then prior period end.

In addition to the core deposit growth we did acquire approximately $670 million of brokered deposits during the quarter which were used to reduce wholesale borrowings primarily from the home loan bank borrowings and Fed funds borrowings.

In the shareholders equity section you can see things we’ve already talked about, preferred stock increased $46.9 million as the result of the perpetual preferred stock that we issued through our own Zions direct subsidiary in July and then common stock increased $258 million. The bulk of that was the result of our very successful ATM Equity program that we launched and completed in early September, that added as noted in the text about $245 million to common equity.

Other comprehensive income was essentially unchanged as we’ll talk about later as additional fair value marks on securities were offset by improved marks on our interest rate swaps that we used to manage net interest income and as a result of all of those moving parts, the tangible capital ratio increased 63 basis points to 6.60% at the end of the quarter.

That’s a number you can find on the previous page 12. Moving on now to the income statement, page 14, first net interest income before provision increased slightly despite the five basis point decline in the net interest margin. That margin decline primarily resulted from lower average asset yields not offset by lower interest bearing, interest costs on interest bearing deposits and also the higher level of NPAs on average through the quarter.

Non interest income I’ll highlight several lines there, dividends and other investment income continued to decline as you might expect in the current economic environment. We had a loss on Farmer Mac stock of approximately $8 million which was partially offset by gains in other investments.

Loan sales and servicing declined as a result of the repurchase of securitized loans from Lockhart funding that occurred late in the second quarter. So we had the income from that service in most of the second quarter and we had essentially none of it in the third quarter. A similar decline is also seen in income from the securities conduit for similar reasons.

As noted earlier the fair value and as I mentioned earlier, fair value and non-hedged derivative loss was $26 million in the period compared to a loss of $19.8 million in the prior period. That again reflects the very, very abhorrent or stressed behavior of the spread between prime and LIBOR. That spread continues to narrow and in relevant measure today there is no spread.

Three month LIBOR is 4.5% and prime is 4.5%. The bulk of the losses last quarter and this quarter are due to marking to market the future stream of in essence that spread and taking that fair value mark through income in the quarter. So these primarily reflect changes in fair value marks. I’ll discuss this again later. You should not think of these as a recurring level even if the spread between prime and LIBOR does not return to anything like normalcy.

These are more like one-time marks and they may come back if those spreads revert to something a bit more normal. We’ll come back to that in the guidance section.

Equity securities gains were nearly $13 million this quarter. There were a variety of gains and losses here. The largest single gain was from the sale of our significant interest in a mutual fund management firm called [Excessor] Capital Management. That accounted for about $7.7 million of the gain.

And finally impairment losses of $28 million on REIT and bank insurance CDOs is the lowest number in the last four quarters is probably in line with or slightly better then our guidance. I’m not going to talk about the non interest expense line because I don’t think there’s a whole lot worth talking about there. But we’re happy to answer questions if there are any about the behavior of any particular lines.

On page 16, changes in shareholders equity and OCI, we give you the period to period roll forward the top third of the page shows you the changes in the first quarter, middle third is the second quarter and the bottom third is the third quarter. Third column from the right, accumulated other comprehensive income or loss, you’ll note the total of negative $158 million June 30 and $157 million at September 30. Essentially other comprehensive income net was unchanged and there were offsetting movements as I mentioned in the fair value marks on AFS securities and the mark to market on our interest rate swaps.

Moving to page 17 the investment securities portfolio, we added this schedule last quarter to provide additional details on the portfolio. I will note a number that isn’t on this page but if you go back into the quarterly income statement numbers you can add up that we have now cumulatively taken $271 million of OTTI charges on this portfolio against income and that number is basically not reflected on this page. It would be sort of to the left hand side of the left most column on the page prior to current amortized costs.

So in looking at how much is capital been hit if you will by the weakness in this portfolio you can take that $271 million and add to it the bottom number in the second column of numbers, net unrealized losses in OCI of $394 million and so cumulatively we have reduced GAAP capital by a pre-tax amount of $668 million or about $434 million after-tax, as a result of a combination of OTTI impairment charges and OCI marks.

And then in addition there are to date $330 million of FAS 157 fair value marks on the held to maturity portfolio that are not reflected in OCI. To save you the trouble of going back to prior quarters, the comparable unrealized loss not in OCI in the second quarter was $184.7 million so the higher default probabilities and higher discount rates have increased that loss from $184.7 million to $330.3 million this quarter.

Now as most of you know there’s been essentially no trading in the bank trust preferred CDOs during the past quarter and this fact required that we move these securities from Level 2 Matrix methodology for determining fair value to Level 3, a model based methodology and we can go into the details of our model approach if you want.

But the key things are we are using an [Imtex] model with default probabilities on every name in the various tranches that we hold. There are 1,014 individual names. We determine default probabilities on each name using a stock market value based approach to default probabilities purchased from a third party service.

We use discount rates on the resulting cash flows that reflect current CDS spreads and discount all of those back on to determine fair value. We’ve also used a Monte Carlo method which looks at the volatility of outcomes of these expected values. That approach would yield substantially less severe marks then are reflected on this page but we have not used those here, we have used the more conservative approach.

Turning to page 18, credit quality, non performing assets increased $227 million this quarter. That’s about $35 million or $40 million less then the increase last quarter. The ending number is $924 million. The percentage increase period-over-period was 32.5% this quarter compared to 61% prior quarter. We’ve seen a slight tapering but only slight in the rate of increase in these NPAs. The largest portion of the increase was in National Bank of Arizona where property values continued to decline during the quarter.

We also saw increased NPAs in Zions bank driven primarily by softer economic conditions. Accruing loans past due 90 days or more decreased slightly, about $11 million. Some of the reduction can be attributed to increased non-accruals and charge-offs and also note that one quarter doesn’t make a trend but it is somewhat encouraging that this number is not continuing to escalate at an alarming rate.

Net charge-offs down in the bottom half of the page were $95.3 million, probably somewhat above our guidance and above the prior quarter but at 91 basis points of annualized on compared to average loans this is still relatively good for the industry today.

This level of charge-offs as we pointed out before we believe has been mitigated by our conservative underwriting including LTD ratio and CRE lending and a stronger consumer portfolio both in home mortgages and in [Heckles] where we avoided the subprime and Alt-A phenomenon.

There’s also the fact that probably a third of our states are still relatively healthy from an economic standpoint, maybe third to a half. We did continue to build reserves in this environment. We in fact built them more then we had expected earlier in the quarter. That decision was reflective of as I said deteriorating economic conditions both that appeared to get worse after the credit seize up and the credit market seize ups that occurred after Labor Day.

So we provided $156.6 million during the quarter, that exceeded charge-offs by $61.3 million and at quarter end and the ratio of allowance for losses to net loans and leases increased from 1.31% to 1.45%.

At quarter end if you annualize the net losses of the quarter that reserve is 1.6 years of annualized losses at the current quarter’s run rate and a little over two years if you take the last four quarters of annualized run rate.

Some additional comments on quality trends, as expected residential acquisition development construction loans in California, Arizona and Nevada remain the most troubled segment of the portfolio and as we’ve indicated throughout the quarter Arizona is the most problematic market and experienced meaningful declines during the quarter.

Accruing loans past due 90 days or more declined slightly from the previous quarter as noted although they do remain elevated and 30 to 89 day delinquencies increased somewhat from the prior quarter although they remain lower then that of the quarter ended, first quarter.

As we all know the general economy continued to slide into recession during the quarter. This broader slowdown was manifest by some measurable deterioration in the general commercial portfolio in some of our geographies, particularly in Utah and Idaho where probably after Amegy Bank we have one of our larger C&I portfolios.

Our expectation that the complete credit market disruption that occurred starting in mid September likely will now result in a more significant and perhaps longer recession, that expectation drove our decision to further increase provision in relation to actual losses. And our loan loss reserve now exceeds 100% or the top end of the range that we calculate using historical data and it is likely to continue to increase for the next several quarters.

Turning to page 19, loan balances by type, commercial lending in total was down slightly during the quarter. The decrease occurred in owner occupied commercial lending and driven by reductions in our nation real estate division. We not only curtailed originations that are not relationship driven in that business but we sold approximately $100 million of these loans at par during the quarter.

C&I loans experienced the only significant growth in the quarter, up to $11.35 billion from $11.25 billion in the prior quarter. The C&I loans in Texas continue to have significant growth but that growth was partially offset by portfolio declines in some other geographies.

As expected commercial real estate construction and land development loans declined during the quarter as projects were completed and problem loans were resolved. There was a slight increase in CRE term loans as some projects were completed and went into operation.

Consumer loans were essentially flat. In summary while total loans were flat we did experience growth in some key markets and loan types while curtailing other segments.

Page 20, as noted previously the net interest margin decreased five basis points, the net interest spread decreased four basis points, the average yield on total loans fell 11 basis points as rates came down coupled with an increase in non-accrual loans.

The average rate on interest bearing deposits also declined but by only three basis points as competition for funding remained very stiff. That is where I will conclude my walk through of the schedules. I’d like to try to sum up now with some guidance for next quarter or few quarters.

First what I’d like to do is talk about the TARP US Treasury Senior Preferred Capital Program. Just note that subject to discussion with and approval by our Board we do expect to apply under this program. The approximate range of amounts for which Zions would be eligible are at the low end about $500 million and at the high end about $1.5 billion.

Our current expectation would be to apply for more then the minimum but probably not the maximum but we’ve not decided how much. We’ll be discussing that over the next week or two among ourselves and with the Board and we know of no reason why we would not receive approval if we do apply.

We have not yet decided whether to participate in the FDICs debt guarantee program but we do have this under active consideration. There is still a number of unanswered questions about how this program will work but essentially we do view the TARP program as the cheapest source of capital by some margin out there at the moment and we do expect to apply.

The additional capital from the TARP program if we receive an allocation or investment would allow us to increase loan growth somewhat which would be good for us and our shareholders and good for the economy, although we would not expect to let it go back near-term to the levels of the second quarter.

We need to keep that loan growth and growth in core funding somewhat in balance even with the additional capital resources. We would expect residential construction and development balances to continue to decline and we do expect to remain selective on underwriting and conservative on pricing. But we would expect to let loan growth resume to a more normal pace assuming an infusion of capital and the availability of funding.

Deposit growth is an issue. We did see some growth; we saw shrinkage early in the quarter due to some significant disruptions in our market, some growth later in the quarter. We do expect that the increase in deposit insurance limits may help deposit growth over coming quarters but too soon to tell exactly what the impact will be and we also do expect over the next year that we will have the opportunity to bid on deposits of one or more additional failed banks within our footprint.

With regard to the margin although loan spreads are improving the very competitive deposit market has effectively negated the impact of increasing loan spreads and we expect that this trend may continue. Recent declines in prime rate have not been matched by declines in deposit pricing and as always the behavior of DDA balance will remain a significant factor in the margin as will potential increases in non-accrual loans.

Again too soon to tell what the impact of 100% coverage of DDA balances with FDIC and deposit insurance may have on those numbers. Absent a very favorable impact from that source we would expect that deposit rate pressures and increases in non-accrual loans would probably lead to a further modest margin compression in the fourth quarter.

Finally credit quality remains a top issue for most of the industry. Our best outlook is that conditions will continue to soften in most of our markets, that residential land and home prices will continue to decline somewhat over the next few quarters in Arizona and perhaps some other markets but deterioration may begin to taper off over the next few quarters.

MPAs provision and losses are likely to increase further over the next several quarters albeit at a slower pace as was the case this quarter. The rate of increase will be driven in large measure by general economic conditions and their impact on commercial and industrial borrowers. We have built reserves this quarter with that in mind and are likely to continue to build reserves over the next few quarters although again possibly not quite as fast as we did this quarter. It remains to be seen.

In summary we believe we are well positioned to weather the cycle but there will be some additional credit costs associated with that. I promised to come back to the non-hedged derivative loss and I’d like to do that. Most of that loss of $26 million reflects fair value marks on the expected spread between three month LIBOR and prime for the next three to five years.

If that spread were to remain exactly where it was at September 30, which was very, very narrow, and that continued through the fourth quarter with no change, the loss on this line item for the fourth quarter would be approximately $3 million. A significant improvement from the $26 million of this quarter.

For every 10 basis points that three month LIBOR and three month LIBOR expected over that maturity range of say three years, for every 10 basis points that LIBOR comes down in relation to prime, we would record a gain of approximately $7.5 million in whatever quarter that occurred.

If the spread were to return to historical normal which is clearly the goal of the US and EU financial authorities we would expect to record gains in the $30 million to $40 million range one time on this line.

If there’s a more realistic sort of new normal, maybe that would result in a pick up of $15 million to $25 million one time. So somewhere out there assuming that three month LIBOR comes under some modicum of control there’s a significant gain to reverse these mark-to-mark losses if you will that have gone through in the last two quarters.

And at that point the run rate for this line would become zero to positive. So for those of you building models probably the reasonable thing to do would be to model that line at zero for the time being and we’ll, and keep your eye on three month LIBOR and how it behaves.

Securities as we’ve discussed, we continue to monitor the performance of the portfolio and we would expect to probably see continued impairments but likely in the range that we’ve experienced in the last few quarters and like we suggested will likely continue for the next few quarters.

And finally we would expect to apply for a significant allocation under the Treasury Senior Preferred Capital program both to increase our flexibility in an uncertain economy, to allow us to increase loan growth to our borrowing customers, and serving their needs, and also to take advantage of what we would expect will be some acquisition opportunities including some fairly low risk FDIC assisted transactions in the next few quarters.

In summary while it was a very noisy and difficult quarter we’re pleased that we were able to strengthen our balance sheet particularly capital when that was a very difficult thing for anybody to do. We improved liquidity. We remain profitable although obviously at a lower level then we would like.

We do expect the next few quarters will remain challenging and test our ability to maneuver through this rapidly changing landscape but we’re confident that we’re positioned in a way that we can continue to do that.

With that I will end the monologue and we’ll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ken Zerbe – Morgan Stanley

Ken Zerbe – Morgan Stanley

In terms of the TARP capital if let’s say you did get the money from the Treasury, I understand your statement you wanted to balance core deposit growth with loan growth, but I think one of the Treasury’s requirements or desires is that banks don’t horde the capital and actually use it to make loans. If you got the capital would you actually get more aggressive with your deposit rates in order to bring in the deposits to make the loans or is it just status quo in terms of your rates?

Doyle Arnold

Not yet decided but I would point out that if it is speculated that most of the industry gets TARP capital and then most of the industry tries to raise its deposit rates and nothing else happens all they’ve done is raise costs and not raise funds unless we pull it from somewhere else. So I don’t know the answer to your question. We do recognize that the intent of the whole program was to get banks lending again and we would certainly participate in that and look forward to doing that.

I would just point out that what we’re not going to do is aggressively load up on wholesale borrowing and tap outlines at the federal home loan banks and so forth and utilize all of our backup liquidity to aggressively grow loans. We’ve got to address the core funding question in concert with having the additional capital.

Harris Simmons

In some markets we are seeing reasonably good deposit growth but we’ve had to really tamp down loan growth and I do think it does provide us a lot more opportunity to act in the spirit in which this program was being offered to banks and that is to really meet the needs of existing customers and to look for good opportunities to continue to expand credit consistent with our ability to generate the funding.

Ken Zerbe – Morgan Stanley

With respect to the $1.4 billion of the trust preferred CDOs that are in held maturity, I did the math on the release you have and it looks like these are currently being valued at roughly $0.60 on the dollar but I know including OTTI, you’ve only taken the very small fraction of those have been written down. Maybe explain in very layman’s terms at what point do you have to take a much larger OTTI on that? Because at 40% loss already its more of a concern.

Doyle Arnold

I don’t think there is any magic point at which we do that. We model that every quarter. We do look for comparable trades in the market and we clearly hear talk of much greater discounts. I will point out that during the last quarter we have been able to identify only one trade in one tranche of a specific CDO that we own. And I will note that that trade occurred at $0.35 on the dollar. We are carrying that security at $0.58 on the dollar. We looked at that trade, we talked to the traders, we followed the trail and we believe that that was a complete capitulation trade. We’ve also analyzed what’s in that security. I won’t go through all of the names but if every security in there except for Wells Fargo, and a GSE failed, and we discounted it at a reasonable rate, that security would pay off at $0.68 on the dollar.

We’ve used a higher discount rate on that security and are carrying that one at $0.58. So this is an example of how the prices that are being bandied about out there are, if you really talk to traders they’re using terms like there’s a handful of bottom fishers that get the joke, that these numbers aren’t real. And that your position is only as strong as the weakest entity that holds a particular security, i.e. which one will have to do a distress sale at that price.

And these very infrequent trades are in no way reflective of the actual values of these securities. So we don’t think there’s any magic time. The SEC or the FASB or both have come out and said there is no bright line test of either percent discount or time of discount, that it’s a facts and circumstances. You’ve got to look at all the evidence including trades but also your own analysis of default probabilities, cash flows and discount rates. And that’s what we’re doing.

Ken Zerbe – Morgan Stanley

So irrespective if these were carried at $0.60 or $0.40 or $0.20 on the dollar in your held to maturity portfolio there’s no correlation with actual write-offs that goes back to a completely different analysis, is that correct?

Doyle Arnold

If we did think that one of those securities was permanently impaired then we would take that impairment through income and reverse any OCI mark that might have been applied against that particular security prior to being reclassified as held to maturity. So yes, we do test these all for OTTI. And we do value them for FAS 157 purposes, the difference is if that they’re held to maturity that is a, that valuation is a disclosure item. It doesn’t effect capital.

Operator

Your next question comes from the line of Steven Alexopoulos - JP Morgan

Steven Alexopoulos - JP Morgan

On Arizona, but could you give where we ended the quarter with resi, construction and land in Arizona and then I was looking to see what the specific reserves were and maybe even charge-offs taken in the quarter there?

Unspecified Company Representative

The residential construction in Arizona is $589 million.

Gerald Dent

I have the total charge-offs for Arizona, I don’t have it against that piece of the portfolio. The gross charge-offs were [$26.8] million.

Steven Alexopoulos - JP Morgan

Do you have the reserves against that portfolio?

Gerald Dent

The reserves that we have in Arizona is $109 million. A good portion of that would be against that portfolio.

Steven Alexopoulos - JP Morgan

Any luck in getting an updated loan to value there?

Gerald Dent

We’ll get that for you.

Steven Alexopoulos - JP Morgan

What was the balance of Lockhart at the end of the quarter and what percent of their CP are you holding?

Doyle Arnold

The balance at the end of the quarter was $840-ish million and we are holding on any given day 70% to 75% of the CP and that’s about where it was at the end of the quarter. The LTV on that piece of the portfolio is 58% and I would caution you that that’s a blend of older and newer appraisals but given the circumstances, all of the properties under distress have been appraised once and in many cases multiple times over the last year.

Operator

Your next question comes from the line of Greg Ketron - Citigroup

Greg Ketron – Citigroup

Regarding TARP realizing we’re in the early stages of the discussion around TARP and the details have you got any clarity in terms of what from the asset side may qualify such as construction properties, possibly the CD [inaudible] portfolios since it appears the government is pretty interested in protecting capital in the banking system?

Doyle Arnold

We’ve seen a sheet that’s been passed around to some banks including us asking us to indicate what kind of assets would we be interested in selling. There were a lot of things you would expect on there, mortgage backed securities and other kinds of loans but also regular commercial and CRE loans, even OREO and then anything we missed that you would like to sell. There has been no feedback of which I’m aware of what they’re actually going to do, how they’re going to run the first auction, what they’re going to do.

I think, my impression is for whatever its worth is that they very quickly changed the focus to the TARP capital program in the near-term and that that’s where the emphasis is and that will roll forward pretty quickly and that asset stuff will follow.

Greg Ketron – Citigroup

On that list would you have put things like construction loans and what’s your thoughts around the CDO [trup] portfolio as a possible asset?

Doyle Arnold

It wasn’t specifically anything that was listed and therefore we didn’t indicate that but there will be a continued dialogue there. I won’t go into the specifics of what we did list. It was a totally non binding list. It was just an information gathering exercise for them to decide where should they focus their efforts to get bang for the buck. Whatever we submitted may not have had any meaning whatsoever particularly given the very large amounts of some of the obvious assets that are held by institutions that we don’t hold.

Greg Ketron – Citigroup

Regarding the CDO [trup] portfolio specifically last quarter you had provided some details in terms of how many banks were on deferral, the Texas ratio of the group, are there any additional statistics you can provide that would give some color on the portfolio beyond what you’ve already done?

Doyle Arnold

The OTTIs this quarter included $4 million on three REIT CDOs, $3.5 million on other asset backed and there were two of those, and then bank and insurance TRUPs there were five that were impaired for a total of $20.5 million. We have 104 bank issuers, that’s down from previous because there have been some failures so they’re off the list and then there’s 218 insurance companies for a total of 1,222 exposures. There have been eight bank defaults and two insurance defaults for a total of 10 and there are 38 banks that are currently in deferral and no insurance companies that are in deferral. That’s what I have readily available.

Greg Ketron - Citigroup

On early stage delinquencies any color that you can give in terms of breaking out the construction portfolio versus C&I versus regular commercial real estate?

Gerald Dent

The construction portfolio has increased, its probably about double what it is in the C&I portfolio. The C&I portfolio is remaining fairly flat at just under 2% and our construction portfolio is about a little over 4%, 4.5%.

Greg Ketron – Citigroup

That would be early stage delinquencies as of--?

Doyle Arnold

That’s everything 30 days and over, including 90 days as well. That’s what those percentages were that Gerald just cited.

Operator

Your next question comes from the line of Jennifer Demba – SunTrust Robinson Humphrey

Jennifer Demba – SunTrust Robinson Humphrey

With the decline in oil recently I’m just wondering how you feel about the economy in Texas and the prospects for Amegy and then you had indicated a few months ago that you were very resistant to reducing your dividend. I’m wondering if things have changed there or if you still feel the same.

Harris Simmons

Well first with respect to oil prices, I think its safe to say that there are very, very few producers or service companies that have been basing any planning assumptions on oil at the prices that we’ve seen over the course of the last year. We’ve certainly seen a significant collapse in price over the last three months or so but I think you’d find that most of them have been using planning assumptions probably around $60 a barrel, $6 per MCFE on natural gas and kind of in that type of a range so those planning assumptions at this stage continue to work.

I think its also, some of you would know that I have a bias because I have a brother who has written extensively on the subject in the matter of [Peak Oil] but I think its really hard to envision prices collapsing way below levels that we’re seeing currently in the market just because of long-term supply issues that I think are very real.

Gas perhaps is a little different matter but we’re not seeing any real strain in our borrowing customers. We have just over $1 billion in credits in this area to the producers and service companies etc. in the Houston market and at this stage of the game we’re not seeing any real strain there.

With respect to the dividends that’s something that we’ll be discussing with our Board. The dynamics of that kind of discussion change a lot with the Treasury equity program and it would be premature to come to any conclusion as to anything that might happen with the dividend. So that’s something we’d have to put off. Clearly if we have a sustained period where we are not earning the dividend that will call into question whether we, what we do with the dividend, whether we trim it. On the other hand we’re going to see capitalization strengthened materially across the industry and so I don’t know, that’s something we’ll have to get back to you on as we have the discussion with our Board.

Operator

Your next question comes from the line of Brian Klock - Keefe, Bruyette & Woods.

Brian Klock - Keefe, Bruyette & Woods

On page four of the press release it does go into detail on the OTTI taken in the quarter and it says that there was three bank and insurance trust preferreds with a $19.2 million OTTI charge, I think you just said it was five banks at $20.5 million, is that right?

Doyle Arnold

There are end notes that make up the difference.

Brian Klock - Keefe, Bruyette & Woods

On the CDO piece do you have the initial par balance for those, so the $19.2 million was the impairment, what was the par balance that was taken against?

Doyle Arnold

I can tell you kind of where it came from, you mean the par balance--?

Brian Klock - Keefe, Bruyette & Woods

What level of impairment was it?

Doyle Arnold

They’re not large. I do not have that.

Brian Klock - Keefe, Bruyette & Woods

Were those--?

Doyle Arnold

They were already heavily written down previously, their carrying values were probably less then $2 million or $3 million.

Brian Klock - Keefe, Bruyette & Woods

How do we think about the 40% haircut that you’ve got on the billion dollars of A-rated bank and insurance trust preferreds and held to maturity, how do we read across how you actually came to this impairment charge on these three CDOs, the level of impairment charge, was it an A rated tranche as well, was it lower? How did you come to the conclusion that that was impaired for those three?

Doyle Arnold

We’ll get that answer for you. What I can give you, if you want to turn to page 17, I’ll just give you the spread of where the impairments took place this quarter, in the held to maturity the A rated asset, in the top half there, the TRUP securities banks and insurance, there were $2 million in the A rated, $12 million of OTTI in the BBB, going down to the available for sale, the asset backed securities, bank and insurance trust preferred A rated $5 million, non rated $1.3 million, real estate non investment grade $4 million and then other non investment grade $3.5 million.

David Blackford

Basically we have all of these securities and we’re talking about the bank and insurance securities in the [Intex] model which those in your modeling side will know it’s a standard model that has all of the waterfalls for each of these built into it and we have the thousand banks in there plus the insurance companies. We actually start out with the probability of default which Doyle explained which we get from the publically traded companies and we use QRM, KMVs and other methodologies, the Merton model, and we get those probabilities of default and then we come up with the cash flows that we expect to receive on each one of those securities through the waterfall, through the [Intex] model.

And then we test it for, test each tranche we test it for impairment to see if in fact after taking out the defaults if in fact we’re going to receive 100% of the principal back. And that in fact is the test which we use and the two securities that are bank and insurance trust preferred that were up in the held to maturity section failed that test. And so then, we subsequent to that, then price the securities and as Doyle mentioned we use the CLO spreads from JPMorgan Chase and we use those spreads against the cash flows that we generate in the [Intex] model and we come up with what we believe the present value pricing is or the fair value pricing and then that determines the amount of OTTI that was taken on those securities that failed the OTTI test.

Brian Klock - Keefe, Bruyette & Woods

Obviously in order to figure out the market value you’ve got different factors that would incorporate what a participant would pay market value for your Level 3 that would be slightly different then the cash flow model you’re using to figure out the impairment. So even if you have a $1 impairment then you’ve got to use the mark-to-market to figure out the level of the mark.

Doyle Arnold

You’re exactly right; you have to run them twice.

Brian Klock - Keefe, Bruyette & Woods

Given that the you have these three is there any sort of, what was different about those three versus the rest of, you said there was some in the A rated, you had $2 million of impairment charge—

David Blackford

The difference was is that the ones that we impaired failed the test and all the rest passed the test.

Doyle Arnold

So it depends on the amount of collateral beneath our tranche and the projected failures of the individual issuers representing that collateral and whether you eat through it all and eat into your principal.

Brian Klock - Keefe, Bruyette & Woods

So the rest of that book, I guess by conclusion, is that there’s enough subordination there to absorb those potential credit lines.

David Blackford

It’s a combination of subordination and it includes the spread which is in the CDO. And of course, the very first thing is the quality of the collateral that’s in the CDO, whether or not they’re deferring or not deferring.

Doyle Arnold

And I might add that we had largely completed the analysis of these things kind of in late September when the CLO spreads changed dramatically and got worse from the perspective of evaluation so we re-ran this all in early October, reflecting more current CLO spreads that were observed kind of right at the end of September. So it’s pretty up to date.

Brian Klock - Keefe, Bruyette & Woods

Maybe just moving into the loan portfolio. I know you talked a little bit just now about the energy portfolio. Can you update us on the results of the SNIC exam and how big the syndicated credit book is for your guys?

Harris Simmons

We’ll hold that for just a minute and try to answer your original question of what were the par values of the securities that got impaired.

Janine Flynn

On the bank and insurance trust preferred securities that we impaired, so other than the income, which was a very small pieces David described, we had two of the securities aggregating $14.5 million of part that were in the single-A category and the haircut on those was about 40%, so the impairment down to a price around 60. And we had one triple-B rated security which was a $20.0 million position and that was taken down to a price of about 40.

Doyle Arnold

Okay, SNIC exam, we had two places where there’s a meaningful number of SNIC credits. In our California bank we have several of large national homebuilders that are shared national credits. And in Texas we have a variety of CNI credits that are in the shared national program. And then we have a few others here and there. I would say broadly speaking, in the national homebuilders the SNIC exam results were one grade better than we were grading them, i.e. we were grading these credits one grade more severely than in the SNIC exam.

As a result of the SNIC exam and further we review, we did upgrade, I think it was three credits but we kept, I think, four more at our lower grade here at the end of the quarter. In other words, we did not upgrade them for the SNIC results.

We had one credit in Utah that was graded worse on the SNIC than we had it, but after a review with our on-site regulators, we did not change that grade. And then we had a handful of one-notch downgrades in Texas on some commercial credits in which they participated.

Gerald J. Dent

I believe it was either two or three.

The total outstanding balance on our syndicated credit portfolio is about $3.0 billion and our commitment on that is about $5.7 billion. The outstanding balance constitutes about 7.5% of our total portfolio.

Brian Klock - Keefe, Bruyette & Woods

Within the increase in NPL it was $195.0 million link quarter increase. Can you break out, either by geography and/or collateral type what makes up that increase?

Doyle Arnold

Yes, I can. I can give it for NPAs, which include the OREO. I don’t have it in front of me for just NPLs. The largest single increase was in Arizona and it went up $107.0 million to $281.0 million of NPAs.

I’m sorry, Zion Bank’s largest dollar amount is $282.0 million in total, but that’s a $68.0 million increase. Then the bulk of the rest of it was Nevada was $160.0 million, which was only a $13.0 million increase and then $130.0 million in California, which was a $31.0 million increase. If you add those together, you’ve got the bulk of it.

Operator

Your next question comes from Anthony Davis – Stifel Nicolaus.

Anthony Davis - Stifel Nicolaus

Could you just give us a little more color on the loan sales. I think it was $100.0 million, in the quarter. Location, types of loans, was any of this OREO?

David Blackford

No, this was in, again, our national owner-occupied CNI small business loan program. We have got a pretty large portfolio of that. The total is broken out on that schedule on page 19 of the press release. The total in that portfolio is $8.8 billion and this was just a loan sale to kind of reduce the balance sheet size to create a little room for some new lending without straining capital ratios. They were sold at par, they were not distressed loans.

Doyle Arnold

I just clarified that the $8.8 billion includes owner-occupied other than those in this national program.

Brian Klock - Keefe, Bruyette & Woods

And Gerry, just any more color on the stress levels that you’re seeing in CNI and in income property, and I would gather perhaps retail income property, by geography.

Gerald J. Dent

We are seeing an increase in the level of cost-side credits, pretty much across most of our banks in the CNI portfolios, but not significant. When we dissect that and try to determine just what type of CNI credits are having more difficulty and causing us to classify them, some of the loans are related to the construction industry, but generally speaking I would say just as large a portion of those loans that are having stress are related to restaurant-type loans. The loans where people have discretionary income that they would spend, those types of retailers and business that are dependent on that are also having stress.

With respect to retail credits in the commercial real estate portfolio, we are starting to see several indications of stress there. We are noticing a lot of the landlords giving concessions in order to retain their tenants. They are starting to see increased vacancies in the Arizona market, in the Nevada, and probably in the California market as well. It would probably be fair to say that those construction projects that are nearing completion are going to have a very hard time leasing up, just because even the national retailers are starting to pull back and cancel their letters of intent.

And so, yes, it’s becoming evident. We have got one retail project in our whole system that has gone to other-estate owned. We have got a few that are classified but it hasn’t hit our portfolio as heavy as I would have expected and as heavy as it probably can. That’s obviously the next segment of the commercial real estate portfolio to [next shoe drop].

Doyle Arnold

In the interest of time we would like to ask you to ask your one most important question and we won’t do follow ups, just out of respect for the people back East and how late it’s getting.

Operator

Your next question comes from Kenneth Usdin- Bank of America Securities.

Kenneth Usdin - Banc of America Securities

As far as to follow on Tony’s question, the deterioration that you’re seeing, it sounds like the construction stuff is getting worse, it’s spilling into other parts of the book as the economy gets worse. So as far as just trying to understand where you have to continue to reserve to, should we expect the magnitude of over-provisioning to also widen in addition to charge-offs going up?

Doyle Arnold

At this point I wouldn’t expect the magnitude to widen. It will continue to exceed charge-offs but clearly something changed after Labor Day, in the economy as a whole. And you’re seeing that in most of the statistics that are coming out, in the Beige Book comments from the Fed earlier this week, so I want to be a little bit cautious about this. But we do expect that charge-offs aren’t about to come down, the provision is not about to come down. They both may drift up for the next few quarters.

I don’t know if we will continue to over-provide at a rate of $60.0 million a quarter. Maybe a bit less but maybe something more. We’ve had some kind of an inflection point, I think is our sense in the economy and it’s too soon to know just how this is going to evolve.

Operator

Your next question comes from Heather Wolf – Merrill Lynch.

Heather Wolf - Merrill Lynch

Is there any way we could get a breakdown of the increase in NPLs by product type as opposed to geography?

Doyle Arnold

Probably not today. We don’t have it this early here in the quarter but we could probably produce it and certainly put it in the Q.

Heather Wolf – Merrill Lynch

Is there any way you could just give us order of magnitude, other than construction? Which loan products drove?

Doyle Arnold

I think that’s the bulk of it. There’s very little of it in the consumer. The bulk of it is in CRE portfolio. And there’s some in the owner-occupied, probably Around $50.0 million of the increase is in that owner-occupied national real estate program. It’s in part reflective of a change in the accounting rules. We think that it’s money-good, that the government will, at the end of the day, exercise provisions to allow it to protect its interest on the guaranteed portion.

But the fact that that takes about nine months to work its way through, we’ve become more conservative in the last two quarters about the point at which we put that stuff on non-accrual. And that probably accounts for, Gerry do you know, is it about $50.0 million this quarter?

Gerald J. Dent

It would be probably less than $50.0 million.

Doyle Arnold

Do you have any other thoughts on how much of this, roughly, might be CNI?

Gerald J. Dent

I think probably the majority of it is residential real estate. I don’t have a specific number, but I would speculate it’s probably about a third of it.

Operator

Your next question comes from Edward Timmons – Stern Agee.

Edward Timmons – Stern Agee

You talked a little bit last quarter about the levels of subornation in the banking insurance CDOs. Can you give us an idea of just the single-A and triple-B rated tranches, where does that stand? If you could ballpark that. And deferrals, they’re kind of increasing at a pretty good clip here, I guess 22 to 38 this quarter. How is that modeled into?

David Blackford

At the present time in our model that we’re using, we’re assuming that any bank, bank holding company, insurance company that defaults is worth zero. We’re assuming no recoveries. And we’re making the same assumption for deferrals, which I realize is fairly harsh but we think that’s what gives us comfort that the numbers are in the ballpark.

So all of those 38 deferrals are being assumed at zero with no recovery.

Harris Simmons

And we don’t have in front of us the level of subordination this quarter. It hasn’t changed all that much.

Doyle Arnold

What would change the real subordination level would be actual defaults, and the fact is there weren’t that many bank failures in total during the quarter and only a couple of those were held in any of the securities that we owned.

Edward Timmons – Stern Agee

Would it be fair to say it’s about 10% for most of these?

Doyle Arnold

The weakest would be low single digits and probably 10% to 20% would be an average. I can’t remember what we said last quarter. Whatever we said last quarter, it’s going to be approximately what it is. It hasn’t changed much at all.

Operator

Your next question comes from James Abbot – Friedman Billings Ramsey.

James Abbot - Friedman Billings Ramsey

On the reserve net charge-off ratio, I’m just looking at that reserve of 145 basis points, the 91 basis points of net charge-off, and that ratio has been narrowing over time. Could you give us a sense if there’s a point where you say enough is enough and you’re going to maintain a spread there? Some banks have maintained a 2 to 1 coverage ratio. What’s your thought on that?

Doyle Arnold

I would first point out that if you go back to a couple of recent investor presentations, we’ve actually tracked that number for us compared to the industry and at the end of last quarter our coverage, by that measure, was about 1/3 higher than the average of the top 50 banks. I think ours was 2 years and the industry average was 1.5 years.

We are still above the industry average from a quarter ago, today, at 1.6. I don’t think there’s a magic number that we have in mind. Again, we build up our reserve from the bottom up and then apply economic factors and we’re now a bit above 100% of the range, which is the first time we’ve ever been above the top end of the range for a company as a whole. And I do think we’re likely to continue to go higher than where we are today, if the economy does continue to soften.

So I don’t know that there’s a magic number that we have in mind there, but frankly I think when all the third quarter numbers are out I suspect we’re going to have, again, a well above average coverage ratio of contemporaneous losses.

And again, if you think about it, and we’ve talked about it, a relatively high portion of our portfolio that is secured by collateral which does have value, means that the loss content in our NPAs, and other loan portfolio, is less than that of people who are doing consumer lending. We have a lot of loans that go to NPA in which we have a significant recovery eventually, whereas a lot of consumer loans don’t go to NPA and go straight to loss. And so you’ve got may banks with much higher charge-off levels than we do at 91 basis points.

Harris Simmons

I think an interesting thing to look at, if you look at 90 day and still accruing loans, ours are running about roughly 10% of NPAs. You are seeing a lot of the big banks with consumer portfolios that are running well over 100%. And that’s a big difference in the kind of portfolio we have.

Operator

Your next question comes from Joseph Morford – RBC Capital Markets.

Joseph Morford - RBC Capital Markets

I’m following up on an earlier question on Arizona. I’m just trying to get a better sense of where we are in the process of working these residential construction issues, maybe relative to California, where it just seems like you’ve classified all the problems, taken some aggressive write-downs.

Doyle Arnold

Keith is the CEO of the bank in Arizona. I’ll let him speak for himself.

Keith Maio

I guess where I would characterize where we are is a kind of a point of delineation between those that are going to make it and not make it, from a residential development and construction standpoint. And so the identification, I think, has become much clearer and I think now it’s a matter of exit strategy, the quickest exit strategy we can find, for those that are not going to make it.

So we have been aggressive in terms of marking those to what we think a market value is and our hope is that we have this clear delineation between those that are going to make it and not make it.

Doyle Arnold

I think during the quarter in a couple of investor presentations I have shown a slide that looks at the percentage of the residential construction and development portfolios in California and the distressed markets in California versus Las Vegas and in Arizona. And third quarter that percentage that was criticized and classified as non-performing in Arizona was quite a bit lower than those other markets. I don’t have the exact number but it’s much more comparable at the end of this quarter.

Operator

Your final question comes from Todd Hagerman – Credit Suisse.

Todd Hagerman – Credit Suisse

In terms of the TARP plan, I think you mentioned in your remarks that you believe you will be invited to participate in the program. I was just curious, from your vantage point and your discussions with your bank supervisors, who do you believe will not be able to participate in the program? Particularly your comments with respect to acquisitions and perhaps a government-assisted transaction?

Doyle Arnold

That is clearly the $64,000 question. And I have would just say I have conflicting impressions from talking to different people about that. I think it’s pretty clear that any bank that is expected to fail in the very near term is probably going to have a hard time. I’m not sure but that’s my sense. Where exactly that line is going to get drawn and how, I don’t have a sense. I have talked to a rating agency and a regulator and others in the last two days and I have very different impressions from those conversations so I can’t really help you.

Todd Hagerman – Credit Suisse

But I’m assuming that perhaps your direct contacts have encouraged you to participate.

Doyle Arnold

They certainly haven’t discouraged me.

Todd Hagerman – Credit Suisse

And just secondarily to that, just in terms of if you could just tie together the changes in your funding and continuous planning that you did this quarter, how that is affecting your decision or your thought process as it relates to the FDIC liquidity program that you alluded to, and perhaps not wanting to opt in to that, if you will.

Doyle Arnold

Well, I didn’t mean to imply that we didn’t want to opt in. We just haven’t decided. There’s real questions that I don’t have answers to as to just what it will apply to. But if you think about it, we did raise nearly $300.0 million of new capital in the third quarter. That capital is cash. At the minimum that we would be allowed to participate in the TARP, that’s another roughly $500.0 million, so you’re kind of looking at $800.0 million of cash raised in a pretty short time, at the minimum participation in TARP. And it goes up from there.

Compare that against how much debt do we actually have maturing in the next 2 or 3 years, and it becomes then a question of it would be nice to roll some of that debt out and push a couple of hundred million of maturities between now and June way out, in the current environment, just to further cushion and remove uncertainty. But it costs 75 basis points a year to do that. So the question is on what terms can you issue it given that cost and is it worth it given the pile of cash that we may well find ourselves sitting on by the end of this year.

I didn’t mean to imply that we wouldn’t do it, it’s just more of an open question than participation in the TARP capital program.

Todd Hagerman – Credit Suisse

Do you have questions of how much leverage would be acceptable, in terms of how much you can really leverage this?

Doyle Arnold

I will ask you to clarify your question and then we have got to cut it off. What do you mean, leverage which? The capital?

Todd Hagerman – Credit Suisse

No, just talking about the proceeds, the dollar figures you just ran through?

Doyle Arnold

Do you mean what are the new risk-based minimums, if you will, that the regulators?

Todd Hagerman – Credit Suisse

Correct.

Doyle Arnold

I keep hearing rumors that they’re higher by 1% or 2% across the board. I have had no clear communication to that effect.

Todd Hagerman – Credit Suisse

I was just zeroing more in on your tangible ratio, more than anything else.

Harris Simmons

I think the answer is simply in this environment everybody wants to have a much higher leverage ratio and capital ratios across the board. I don’t think anybody has figured out whether this is going to find equilibrium yet.

Doyle Arnold

Every $500.0 million would add 100 basis points across the board to every capital ratio that we have. So you can kind of scale it that way. It moves the needle a lot in the upward direction.

With that I think we should cut it off. I know it’s getting very late back East and I appreciate all of your interest and perseverance. I know that it’s hard for you guys to sort through all of this. The permutations and combinations are coming so fast now that there are days when it’s hard for us to sort through them all. But I think, clearly, this TARP program is going to be a game changer in many respects and we don’t probably appreciation all the dimensions of that yet. But the world will look different after that.

So thank you very much.

Operator

This does conclude today’s call.

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