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NewStar Financial, Inc. Q3 2008 Earnings Conference Call Transcript

November 20, 2008 | about: NEWS

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NewStar Financial, Inc. (NEWS)

Q3 2008 Earnings Call

November 5, 2008 at 10 am ET

Executives

Timothy J. Conway - Chairman of the Board, President and Chief Executive Officer

John K. Bray - Chief Financial Officer

Analysts

Sameer Gokhale - Keefe, Bruyette & Woods

James Shanahan – Wachovia Capital Markets, Inc

Jim Ballan - JP Morgan

David J. Long – William Blair & Company, LLC.

Brian Hagler – Kennedy Capital

Presentation

Operator

Please standby we are about to begin. Good morning, ladies and gentlemen and welcome to the NewStar Financial’s third quarter 2008 earnings conference call. My name is Dana and I will be your coordinator for the call today. At this time all participants are in a listen-only mode. We will conduct the question-and-answer session following today’s presentation. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Colleen Marcy, please go ahead ma’am.

Colleen Marcy

Thanks, Dana and thanks to everyone for joining us for our earnings conference call where we will be discussing our third quarter 2008 results. With me today are Tim Conway, Chairman and Chief Executive Officer of NewStar Financial and John Bray, Our Chief Financial Officer.

Before I turn the call over to Tim, I want to remind you that we have posted a presentation on the Investor Relations section of our website www.NewStarFin.com. Also available on our website is our financial results press release which was filed on Form 8-K with the SEC this morning. This presentation and our financial results press release contain additional materials related to this conference call that we may refer to during our remarks today including information with respect to certain non-GAAP financial measures.

This call is also being webcast simultaneously on our website and the recording of the call will be available beginning at approximately 1:00 p.m. Eastern time today. Our press release and website provide details on accessing the archived call.

Also before we begin, I need to inform you that statements in this earnings call which are not historical facts may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements including statements regarding future financial operating results involve risks, uncertainties, and contingencies many of which are beyond NewStar’s control and which may cause actual results to differ materially from anticipated results. More detailed information about these risk factors can be found in our press release issued this morning and in the Risk Factor section as updated on our quarterly report on Form 10-Q.

NewStar is under no obligation to and we especially disclaim any such obligation to update or alter our forward-looking statements whether as a result of information, future events or otherwise except when required by law. NewStar plans to file its Form 10-Q with the SEC on or before November 10th and urges its shareholders to refer to that document for more complete information concerning the company’s financial results.

Now I would like to turn the call over to NewStar’s Chairman and Chief Executive Officer, Tim Conway.

Timothy J. Conway

Thanks, Coleen and thanks joining the call today to discuss our third quarter results. I will begin by providing my perspective on current market conditions and by highlighting key aspects of our performance in the third quarter; performance that should distinguish us amongst our peers for our ability to generate profits and to maintain adequate liquidity while also continuing to lend to our customers. Our ability to maintain this balance is the result of the many actions we have taken the conservatively position NewStar to perform in very difficult market conditions. After I hand it over to John Bray to provide additional detail on our results, I will conclude with comments about our business strategy and outlook in the current environment.

So let me touch briefly on the lending environment. To state the obvious, these are challenging times and the outlook is far more uncertain than it has been. Virtually, all lenders including ourselves are constrained to some degree by the lack of liquidity. Many have stopped or significantly curtailed lending and shifted their focus to conserving cash. CLO asset managers, who over the past few years have represented as much as 75% of senior debt capital invested in above the syndicated leverage loan markets had now been largely sidelined for over a year. As a result, there was very little volume in the syndicated loan market in the third quarter and leverage loan prices in the secondary market have reached historic lows.

In the middle market, many of our competitors continue to be sidelined in several prominent middle market lenders had completely withdrawn from the market, that leaves NewStar among a small number of active lenders in that marketplace. While these conditions translate into a significantly slower pace of market activity, financial sponsors have remained active and new deals continue to be executed. The risk return profile of new deals is compelling with pricing currently in the LIBOR plus 650 to 750 range and senior debt to value typically between 30% and 40%.

After the dramatic shift in sentiment, we expect this favorable lending environment to prevail for an extended period of time. I also believe that we are now headed into a period that will be characterized by higher default, sustained stress on financial markets and limited liquidity which will present attractive opportunities for well-positioned lenders in a wide range of markets. While we expect volumes to be constrained during this period, we believe that we will be able to increase our portfolio modestly with conservative restructured and well-priced assets. So let us turn to our results which represent the third consecutive quarter in which we have added the booked value.

For the quarter, the Company generated adjusted earnings of $7.4 million or $0.15 per share. GAAP earnings were $7.6 million or $0.16 per share. Although the margin was down in the quarter, it did not reflect the deterioration in the fundamental relationship between credit spreads and assets and liabilities. John will detail the components of margin and demonstrate that long spreads should actually been increasing faster than our cost of funds. And that margin in compression was driven principally by timing differences and LIBOR we set between our assets and our liabilities. This is due principally to the fact that more than 70% of our loans are funded by term debt with attractive locked-in spreads. As a result, we expect to see the margin improve as loan spreads continue widening faster than increases in the cost of funds over time.

While we are capitalizing on today’s favorable ending environment, we remain cautious and highly selective in the third quarter. We originated $178 million of new loans including $133 million that we held on the balance sheet; an amount roughly equal to run-off in the quarter. This reflects our objective to continue lending to our clients while also protecting both value and preserving liquidity.

Corporate loans comprised 100% of our loan origination volume in the quarter. As I discussed last quarter, we have chosen not to originate new commercial real estate loans in favor of reducing our exposure to the Sassy class until we have more clarity about the funding strategies for this line of business.

We experienced a moderate decline in credit performance in the third quarter. John will provide additional detail but in summary, NTAs increased from two to three loans. Net charge offs for $5.3 million up from $2.3 million in the prior quarter and specific reserves increased to $11.5 million from $2.7 million. We also increased our total reserves in the third quarter to $44.9 million or 187 basis points. We believe that this level is appropriate for a 95% first lane senior loan portfolio in this environment.

Reserves at the end of the quarter were 1.7 times NTAs. As I have said before, we assumed that a senior debt portfolio such as ours, will experience about a hundred basis points of annual charge offs through a complete cycle. Lower in good years and higher in tough years. Our current charge off rate is 87 basis points and we currently estimate about a hundred basis points and charge offs for 2008.

Overall leverage loan market default rates have increased to 3.6% for the third quarter and they are expected to increase as the economy weakens. Our current outlook for credit cost is strongly influenced by the direction of the overall economic environment. While we recognize as this cycle is unique in many ways; our team has managed through multiple cycles over the past 20 years. We built the Company and operate effectively through a range of business conditions we believe it can sustain higher level of credit losses while protecting book value through a downturn.

In the last call, I referred to an expected charge-off range of approximately 75 to 125 basis points in 2009. Well, that range may still be possible, I believe that it is too difficult to reliably estimate expected credit cost given the degree of economic uncertainty, continued stress in the financial markets, and unknown impact of the various government-assisting programs just underway.

We expect our portfolio to perform well on a relative basis given our conservative position. So with that, I will turn the call over to John to provide more detail on the quarter and then I will come in on our strategy in this uncertain environment. John?

John K. Bray

Thank you, Tim. My presentation will follow the slides we provided on our website along with the earnings release. If you would turn to Slide 6, Slide 6 summarizes our financial results for the third quarter of 2008. Adjusted net income was $7.4 million which is defined as GAAP net income excluding after tax, non-cash compensation expense of $1.1 million for the third quarter of 2008 related to the restricted equity grants made in connection with our Initial Public Offering offset by a $1.3 million tax true-up related to the 2007 residual interest. This resulted in an adjusted basic and diluted income per share of $0.15. On a GAAP basis, net income was $7.6 million and $0.16 per diluted share for the third quarter.

Our share count on a weighted average basis was $48.5 million shares and as Tim said, we added to booked value through the third consecutive quarter during difficult economic times. At the end of the third quarter, our booked value per share was $11.91.

If you would now turn to page 7, or Slide 7, you can see that our diversified funding sources totaled $3.2 billion; as you can see at the bottom right hand chart on page 7. We had approximately $335 million of undone commitments under our credit facilities as of September 30th. As you know, our warehouses are not subject to market-to-market collateral evaluations. In addition, we had $39 million of reinvestment capacity in our existing CLOs at attractive locked-in spreads as of September 30th. In the third quarter, we were able to reinvest approximately $85 million into our CLOs. Our CLOs have reinvestment periods that are significant. Our $600 million CLO from 2007 has a six year reinvestment period and our $500 million CLO in 2006 has a five year reinvestment period. The reinvestment period on our $375 million CLO for 2005 has expired in October and we were able to max out the loans contributed to it. We also had a $158 million of investment capacity in our $400 million private CLO with Deutsche Bank.

We continue to have a strong cash position. We had $105 million of restricted cash on our balance sheet including $74 million of restricted cash available for reinvestment and $27 million of restricted cash available for debt service. Taken together with our unrestricted cash of $133 million, our total cash available was $238 million at quarter end. We have had continued access the capital during this market dislocation.

Subsequent to September 30 we extended the maturity and received commitment for renewal of our warehouse facility with Citi and we have entered into a new revolving line with Union Bank at California during the third quarter. In connection with the Citibank renewal, we reduced the size of the credit facility from $400 million to $300 million and terms are consistent with the terms of other recent comparable financing arrangements. We continue to explore various opportunities to bolster our funding platform which Tim will talk about later.

We are introducing a new slide, Slide 8 to give you a detailed look at our borrowing and funding capacity and our pricing and leverage by termed and warehouse lines. We have included in the supplemental schedules section of the presentation, the slide we used previously called the Liquidity and Funding Capacity.

At the end of the third quarter, more than 70% of our loans were funded with term debt at very attractive locked-in prices with long-term maturities. Total funding capacity was $683 million at quarter end, if we optimize advanced rate in each facility. We had $667 million of funding capacity in our credit facilities and term debt and $16 million of unleveraged cash.

Including capacity generated from our ability to reinvest cash from amortization and prepayment activities in the existing portfolio which is about 15% per year, our total capacity would support the next 12 months assuming approximately $1 billion of originations and no additional liquidity. But, as I mentioned earlier, we extended maturity and received commitments to renew of our Citi’s facility and reduce the slide to 300. If you pro forma for that which occurred after 9/30, for the Citi facility, we estimate the total capacity factoring in the amortizations would be between $750 million to $800 million and total capacity excluding amortizations would be slightly under $500 million. We intend to continue to manage this capacity to take advantage of the most optimal loan originations that we are seeing in this very attractive market.

If you turn to Slide 9, Core Business Performance, you will see our managed loan portfolio was roughly $3 billion equal level in the past two quarters. Our origination volume was essentially offset by prepayments, and amortizations in loan sales. In 2008, the market has slowed down significantly. We have gained market shares since many of our competitors were winding down or on the sideline. Our adjusted revenue reflects the slower pace of managed asset growth; however, for the third quarter, it was $30.6 million up from $29 million in the second quarter.

Net interest income declined slightly to $25 million from $26 million in the second quarter. I will explain the factor as affecting manager’s income in the net interest margin in greater detail later. Non-interest income excluding net losses on assets was $5.5 million in the third quarter compared to $2.6 million in the second quarter, primarily due to a syndication which drove the gain on loan sale and also due to higher customer fees. Adjusted revenue is relatively flat year-over-year, the managed portfolio has a 14% year-over-year growth and that is what is driving the year-over-year growth in net interest income.

Slide 10 describes the amount in composition of the third quarter origination volumes and related revenues that of the origination volumes drive. Our total originations for the third quarter as Tim said were $178 million, $133 million was retained on NewStar’s balance sheet, $42 million to be syndicated to others, and $3 million was to be booked in NewStar Credit Opportunities Fund. Credit spreads and the amortizing fees on new loans originated in the third quarter were more than 540 basis points over LIBOR of a 195 basis points from the third quarter of 2007. We continue to get LIBOR floors in our transactions and over 15% of our portfolio now includes them.

If you move to Slide 11, which again another new slide, it gives you a detailed look at our net interest margin. Over the last five quarters, our net interest margin has been very stable. The net interest margin was [390] in Q3 down from last quarter’s 417. This drop is related to three downward pressures and one upward lift. The upward lift is loan spreads increased nine basis points due to the re-pricing of loans and new originations in the portfolio. In the quarter, approximately $350 million was re-priced by an average of 38 basis points upwards due to pricing grids and amendments. New business spreads as I mentioned for the quarter were 543 basis points above LIBOR versus 532 last quarter and 345 a year ago.

The downward pressure in the margin was driven by three factors: first we lost six basis points because we made a decision to move our cash into more conservative investments, seven basis points was due to increased interest expense and financing fees associated with our borrowing facility renewals and lastly, we were off 15 basis points due to the timing and replacing on the LIBOR rates on our loan contracts versus our LIBOR contracts less the liability contract which is just a timing difference.

We now move to Slide 12, this again shows how diverse our loan and investment portfolio really is. We have purposely built our portfolio to be balanced across industry sections.

Slide 13, now gets into the credit metrics that Tim talked about earlier. Our allowance for credit losses was $44.9 million or 187 basis points on period and loans excluding securities and loans held for sale. At June 30, our allowance for credit losses was $38.2 million or 160 basis points. Non-accrual loans increased to $26.4 million from $10.1 million at June 30th. Last quarter we had two non-accruals, this quarter, we have three. We have established an additional $11.5 million for specific reserves to reflect expected losses in the third quarter of 2008 compared to $2.7 million in the second quarter. We incurred charge offs of $5.3 million or 0.87% of loans on an annualized basis for this quarter compared to $2.3 million or 0.38% of loans on an annual basis in the second quarter. Credit remains uncertain given slowing economic conditions and charge off may be lumpy quarter-to-quarter as the table certainly shows.

If you go to the next slide, Slide 14 which is our income statement. As I mentioned earlier, adjusted net income was $7.4 million now drilled down at a different components. Net interest income was $25 million for the third quarter compared to $26.5 million for the second quarter. A net interest margin, as I stated earlier declined to 390 in the third quarter from 417, provision was $12 million for the quarter versus $3.7 million. Non-interest income increased to $5.5 million this quarter from $1.6 million last quarter primarily due to the gain on sales alone resulting from a completed syndication and higher customer fee. Our asset management fees remained essentially flat quarter over-quarter. Expenses decreased to $8.5 million in the third quarter from $13.5 million in the second quarter reflecting a lower expense base, no severance expense in the third quarter and lower compensation expenses. We do, however, anticipate expenses will have a higher run rate in the fourth quarter by approximately $1.5 million to $2.5 million in the fourth quarter due to higher variable compensation.

The last slide I will review is Slide 15, which details the balance sheet in NewStar’s booked equity value at quarter end with $578 million booked value per share as of September 30 as I said with $11.91. The equity asset ratio is 21%. I will now turn it back to Tim.

Timothy J. Conway

Thanks, John. So to summarize, I believe there are several factors that will enable us to distinguish ourselves through this period. First and most important is the senior and diverse nature of our portfolio. Second, we have consistently provided capital to our customers despite market disruptions, direct origination has enabled us to continue to build market share and had important implications for the mixed of assets in our portfolio.

At the end of the third quarter, roughly a third of our portfolio represented loans originated since the credit crisis began. In other words, those loans closed in the fourth quarter of 2007 or later. Next, we built a solid funding platform with significant capacity and we have managed liquidity very carefully. We have $1.9 billion of term debt issued through CLOs and several financings that mean that over 70% of our assets are funded with longer-term locked-in liabilities. We also have developed a strategy for deposit funding and are in the process of evaluating specific alternatives to execute on that strategy. Longer term, we expect deposit-based funding to be a significant part of our capital structure. We have also continued to demonstrate the quality of our bank relationships through renewals of warehouse lines and additions to term funding capacity.

As John mentioned, we are in the process of renewing one of our primary warehouse lines with Citibank. Over the terms of that renewal result in a $100 million reduction in committed funds, it reflects the reality faced by all companies that less credit is available. We continue to have a very strong relationship with Citibank and have sufficient capacity to support our origination objectives. Overall we continue to maintain conservative balance sheet with modest leverage of 3.6 times and ample liquidity as of the end of the quarter.

So in summary, I believe that we have appropriately positioned the Company. We are actively managing our credit portfolio to stay ahead of emerging credit issues. We continue to demonstrate access to capital and we have preserved liquidity and protected booked value while continuing to build franchise value with our customers. We have developed a comprehensive deposit strategy. We believe that we are in a good position to execute on that. That concludes my prepared remarks and we will now open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Sameer Gokhale – KBW.

Sameer Gokhale - Keefe, Bruyette & Woods

Hey, good morning. I have a question specifically on credit. In my note, you have mentioned that the current outlook looks somewhat uncertain. We know the economy is pretty weak. One of your competitors also said today that they expect this to be a deep recession,, but if you look at your portfolio which seems to consists primarily of senior secured loans and if you are able to extend credit to your borrowers then what else are you seeing? We know that a general macro economic weakness was just to be expected but what else are you seeing that makes the credit outlook just completely uncertain as opposed to having like an upper bound for credit losses? So I just want to get some clarity in your thinking there or your perspective.

Timothy J. Conway

I think we feel like we have been operating in a recession for a while. I think that I have never experienced as much uncertainty or volatility in these markets and although we have not seen material impacts on our borrowers in a broad based way, we are seeing some in certain sectors. I think that we are all anticipating, given the uncertainty, a pretty severe contraction in the economy. How long it lasts and how deep it is, is to be determined but we are preparing for a serious recession and as we look at our portfolio companies and forecast out the prospects and the value of those loans, we are taking into account a pretty conservative view of what economic growth or contraction is going to look like over the period of time here and I think it is pretty obvious that building products had been under pressure for a while, transportation. Clearly in this environment with consumer spending down significantly in the last couple of months, we are worried about restaurants and retail. Ad based media has softened to a degree so we feel like there is a pretty obvious trend towards lower cash flows and increased credit problems in the economy. I think that we have been anticipating this for a while and I think that, as you said, the fact that we are well-positioned in genuine firstly in senior debt with conservative loan devalues is a great pleasure to be in this part of the economy but I do think that credit costs are going to go up for all lenders and I believe that we are going to be relatively well-positioned and I think well maybe that the economy is not as bad as everyone anticipates but even looking at right now, just the shocks we have been through and I think the impact on consumer spending you have to assume that certainly the first half of 2009 and probably all of 2009 is going to be very difficult from a credit perspective.

Sameer Gokhale - Keefe, Bruyette & Woods

Okay. That is helpful color and then in terms of your liquidity position, I think John went over it in some detail. But one of the things I just wanted to clarify was the Wachovia and Texas facilities I believe come to you in April or May of 2009. Is it too early to begin a negotiations on extending those facilities or when can we expect to get news about those facilities in the news potentially?

Timothy J. Conway

Never too early. I will let John answer that.

John K. Bray

As to Tim’s point, “it’s never too early.” I mean we are always, I think we have very good relationships with our banks and we are always talking about what is the best way to look at them and take advantage of renewals and things of that nature. There will be more to come on all of them as we go forward.

Sameer Gokhale - Keefe, Bruyette & Woods

And can you remind us that [interrupted]

Timothy J. Conway

I think one very key differentiating factor for a firm like us is the relationships and ongoing support that we have gotten from our banks. I think this is a, we have said it time after time in this calls, but I believe that as the market gets tougher, it is more and more obvious that the banks are under severe pressure themselves and the fact that they continue to support us, we are on the top of the list of the preferred lenders especially financed with these firms and we feel very comfortable with our ability to continue to access liquidity and that puts us in a relatively small group of players who have demonstrated that ability over the last period. Timing is a huge differentiating factor for us.

Sameer Gokhale - Keefe, Bruyette & Woods

Okay. And then as far as you existing warehouse lines go, can you also remind me if there are any aging provisions in those, some facilities than they have provisions where if you have loans outstanding for more than a year, you have to move them out of those facilities. Do you have similar provisions on your warehouse lines?

Timothy J. Conway

We have provisions like that, they tend to get handled when you do the renewals, if there is something that needs to be reset and timed.

Operator

Your next question comes from the line of James Shanahan – Wachovia Securities.

James Shanahan – Wachovia Securities

Thank you. First of all thanks very much for the commentary in the high quality disclosure. We sure appreciate that. A couple of quick questions, I guess we will call it a rapid fire-around. On the Citi facility, in my notes here, in the model I had LIBOR plus 125, with advanced rates of up to 80%. How will you suggest we think about the funding cost and the advance rates on the new facility at this point?

Timothy J. Conway

When we kind of get the file renewal, that will be something we disclose in 8K, but it think the way to think about what you are seeing out in the market these days is you are seeing advance rates from somewhere 60% to 70% and LIBOR 250 to 350 in pricing.

James Shanahan – Wachovia Securities

Helpful. And I guess this is question for Tim. Can you update us on what your most recent thoughts are with regards to potential deposit franchise, and also regardless on whether or not you pursue that, did you have any interest than just fading in the TARP?

Timothy J. Conway

Yes James thanks, good question. I think we are, as I mentioned in the last call, we are very focused on the strategy of building out, owning and building a depository franchise. We have hired a number of advisers and we have been working on this for a period of time. We are looking at a variety, range of different charter alternatives all the way from the DeNoble to buying an existing licensure charter and I think that the likelihood is that the latter will be the strategy we would execute on. We would expect over time, the likelihood is that we will become a bank holding company as a result of our strategy around this whole issue. So I feel like as I said in the last call, we have experienced management team that has dealt with regulators. We have done a very comprehensive job of laying out the pros and cons and alternatives of the various strategies we might execute on and now we are in the execution phase and I cannot give you a time frame, but I feel that over the medium term deposit funding will be an important part of our funding base. In terms of the tarp, I think that right now the landscape and regulations of the provisions around these things are changing significantly. It is certainly something that we would consider and potentially be interested in. Right now it has been earmarked towards banking depository institutions. Regulated banks as you know there has been talk about extending that to beyond that universe and certainly to the extent that the regulators and the government expand that program. We would be a logical choice to be a recipient of that kind of capital given the fact that we are one of the larger lenders in the middle market and that would continue to enhance our ability to provide capital which I think is you are going to be cut to at all is really the primary objective of the treasury in this whole program. So I think we, to the extent it is expanded, we would be a logical choice, we would certainly consider it and I think that to the extent that we are in the meantime actually do have a banking franchise, we clearly will be looking at that as an alternative as well.

James Shanahan – Wachovia Securities

A quick follow up on that. Do you think that it is possible that your competitors that are structured as PDCs to potentially have access to TARP? Or opt to station the TARP program?

Timothy J. Conway

Yeah. I do know. I could take a guess but I just think that it is so uncertain right now that I would not even conjecture as to whether they would be part of it or not.

James Shanahan – Wachovia Securities

Okay. Thank you and John, when do you expect to file the Q? Will that be tonight? I seem to recall that happens pretty quickly after your report.

John K. Bray

Yeah, it would certainly be in the next couple of days.

Operator

Your next question comes from the line of Jim Ballan – JP Morgan.

Jim Ballan – JP Morgan

Great. Thanks a lot. I just have one question is, when you are out looking at originations, today, do you feel the pricing that you are getting right now or are you just fully reflecting the risk given the macro environment? And I guess it is another way of asking you, do you have unlimited funding, like how aggressive would you want to be here?

Timothy J. Conway

I think we would be more aggressive, we would deal more volume. I will say that volumes have slowed down just because there has been so much disruption and we expect that as things settle in they will, if conditions will be attractive and then there will be some more volume, so that has been a little light and there is two ways to do it. One is in the primary market for new issues and the other one is to go out and buy secondary loans. With unlimited capital, I think we would continue focus on the primary and new issuance market and that is really a couple of reasons: one, we are building franchise value with our customers but I think even more importantly, the new loans that are being structured have such attractive risk parameters that in a going into a recessionary environment and stressing out the numbers in that environment is still very kept comfortable with the loan devalue. We are seeing deals as little as 20% or 25% seem to get loan devalue. Customers need some senior debt so they are willing to get a very, very conservative and well-priced piece of debt from us so, we would clearly put on more of that and you compare that a little bit towards in the secondary market, you see some very large spreads given at discounts in the secondary market but that is a little bit different although the pricing there can be attractive. You are buying deals that are, especially in broadly syndicated market that are more levered and more susceptible to an economic downturn so you have to make that trade off. Our primary trust has been and will be to invest in new issue and we think in this market, the new issue risk parameters are very attractive.

Operator

(Operator instructions) Your next question comes from the line of David Long – William Blair.

David J. Long – William Blair & Company, LLC

Good morning, guys.

Timothy J. Conway

Hi, David, how are you?

David J. Long – William Blair & Company, LLC

Good. The net charge off kinds, you gave a hundred basis points for 2008. Given net charge-offs run about 60 basis points the first three quarters, should we assume that charge-off rate is going to be around 2% in the fourth quarter?

Timothy J. Conway

It is really taking a look at the specific reserves we put up and estimating what the charge-offs will be on the names that we have reserved for already. Again, I think it is very hard to estimate but I think that based on our planning right now and forecasting for the year that is where the charge-offs will come in. We think that charge-offs rates specifics and charge-offs will increase in 2009. But there is nothing that we are looking at right now that would suggest that we are going to have a significant increase in charge-offs in Q4.

David J. Long – William Blair & Company, LLC

Okay. That is all I got, thanks, guys.

Operator

And we have no further questions in the queue but just as a final reminder (Operator Instructions). Your last question comes from Brian Hagler – Kennedy Capital.