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NewAlliance Bancshares, Inc. (NYSE:NAL)

Q2 2008 Earnings Call

July 30, 2008 2:00 pm ET

Executives

Peyton R. Patterson - Chairman of the Board, President, Chief Executive Officer

Merrill B. Blanksteen - CFO, Executive Vice President and Treasurer of NewAlliance Bancshares and NewAlliance Bank

Donald T. Chaffee - Executive Vice President - Chief Credit Officer of NewAlliance Bank

Judith E. Falango - FVP, Investor Relations

Analysts

Ken Zerbe - Morgan Stanley

Christopher W. Marinac - FIG Partners LLC

James Abbott - Friedman Billings Ramsey & Co.

Damon DelMonte - Keefe Bruyette & Woods, Inc.

Collyn Bement Gilbert - Stifel Nicolaus & Company, Inc.

[Theodore Acovalis - Granada Capital]

[Brian Hegler - Kennedy Capital]

Matthew B. Kelley - Sterne Agee & Leach, Inc.

Operator

Welcome to the NewAlliance Bancshares second quarter 2008 earnings conference call. (Operator Instructions) Now I would like to turn the conference over to Ms. Judith Falango.

Judith E. Falango

Please keep in mind that statements in this conference call if any concerning future results, performance, expectations or intentions are forward-looking statements. Actual results, performance or developments may differ materially from forward-looking statements as a result of known or unknown risks, uncertainties and other factors including those identified from time to time in the company’s filings with the Securities and Exchange Commission, press releases, and other communications. Actual results also may differ on the company’s ability to successfully maintain and integrate customers from acquisitions. The company intends any forward-looking statements to be covered by the Litigation Reform Act of 1995 and is including this statement for purposes of Safe Harbor provisions. Listeners are cautioned not to place undue reliance on forward-looking statements which speak only as of the date of the conference call. Except as required by applicable law or regulation, the company undertakes no obligation to update any forward-looking statements to reflect events or circumstances that occur after the date when such statements are made.

Now I’d like to hand the call over to Peyton R. Patterson, Chairman, President and Chief Executive Officer.

Peyton R. Patterson

Following my remarks, our Chief Financial Officer Merrill Blanksteen and our Chief Credit Officer Don Chaffee and I will be happy to take your questions.

I am pleased to report that our second quarter results continue to show strengths in many areas resulting from our intense focus on the fundamentals during these turbulent times for banking. Specifically, loans increased 4% during the quarter with growth registered in every major category. Core deposits increased 6.3% during the quarter led by a $222 million increase in regular savings account balances. Total deposits grew by 1.7% recovering almost the entire first quarter decline in deposits that had resulted from our aggressive reductions in deposit rates in the first quarter. And while simultaneously growing the deposit base, we improved the margin for the second consecutive quarter up 11 basis points in the second quarter and 18 basis points year-to-date.

Meanwhile, non-interest expenses remained well controlled and improved $920,000 from the prior quarter which included unusual severance charges. Credit quality remains strong at NewAlliance despite the $7 million increase in nonperforming loans during the quarter bringing nonperforming loans to 53 basis points of total loans. Also, charge-offs increased to $1.3 million for 11 basis points of average loans on an annualized basis. Because of the increase in nonperforming loans coupled with the 4% growth in total loan portfolio representing $190 million increase we felt it prudent to record a loan loss provision of $3.7 million for the quarter. I would add however, we attribute approximately $1.2 million of the $3.7 million to that portfolio’s growth. This resulted in an increase in our loan loss reserves to 97 basis points of total loans. While no one likes to see credit costs go up, the increase comes off of our exceptionally low historic levels and Don will have more to say about asset quality later.

Now let’s get to the details beginning with our overall earnings trends. Our earnings for the second quarter of 2008 were $11.8 million or $0.12 per diluted share compared to a loss of $3.9 million or $0.04 per diluted share in the second quarter of 2007. The 2007 results were impacted by the securities restructuring we completed last summer. Without the securities restructuring and without last year’s merger-related charges, comparable earnings in 2007 were $11.1 million or $0.11 per diluted share. On a linked quarter basis earnings were down $1.2 million or $0.01 per share from the $12.9 million or $0.13 per share level reported in the first quarter. The prior quarter benefitted from a lower-than-normal effective tax rate as we recorded the benefit of a successful conclusion to the IRS tax audit. If you remove that factor and look at pre-tax earnings, then our results were unchanged from the prior quarter at $17.8 million.

The key components of our results this quarter compared to the second quarter a year ago were our net interest margin increased 23 basis points to 2.67% compared to 2.4% a year ago driven by a 46 basis point improvement on the yield of our investment portfolio and a 48 basis point reduction in the cost of interest-bearing liabilities. Total revenues led by the improvement in net interest income grew by $5.4 million or 9.3% adjusted from last year’s restructure charge. Average loan balances increased by $294 million or 6.4% with growth coming from most major portfolios. Residential loans grew by $200 million as we were able to originate record volumes of mortgage loans within our footprint at much higher spreads than a year ago. Deposit costs were reduced by $7.9 million or 24% primarily a result of a 72 basis point decline in the costs of interest-bearing deposits as more expensive time deposits shifted to regular savings or were repriced downward. Average balances of regular savings accounts grew by $333 million or 37%.

Controlling growth in non-[inaudible] expenses remained a strong focus in the second quarter. Compared to a year ago expenses increased by only $382,000 or less than 1%. Our efficiency ratio improved by 414 basis points declining from 70.73% to 66.59% excluding merger charges. Non-interest expenses average out this decline from 2.05% to 2.02%. Although the loan loss provision increased by $3.1 million net income increased by $700,000 or 6.3% compared to last year’s results of $11.1 million before restructuring and merger-related charges.

We are again pleased with the improvement we saw in the per common share data. Book value increased to $13.03 from $12.61. Tangible book value increased to $7.70 from $7.41. On a diluted basis weighted average shares outstanding declined by $4.3 million as a result of share buy-back activity.

And now comparing the linked quarters. Net interest margins improved by 11 basis points to 2.67% compared to 2.56% for the first quarter of 2008. Average loan balances increased by $118.1 million or 2.5% from the prior quarter driven by growth in all loan categories. Deposit costs were reduced by $5.2 million while average balances of core deposits increased by $236.6 million. Total revenues grew by $1.1 million driven by the growth in net interest income. Non-interest income declined by $1.1 million as investment management, brokerage and insurance fees dropped by $688,000 during the quarter. A decline in annuity sales revenue of $319,000 occurred during the quarter as our customers showed a renewed preference for deposits during the quarter with overall deposits growing by $74 million. Other income benefitted from limited partnership gains of $855,000 during the quarter compared to a loss of $209,000 during the first quarter. Non-interest expenses remained well controlled and were down $920,000 from the prior quarter which included an unusual severance charge. Advertising expenses increased as we used advertising and sales incentives to help drive the growth in core deposits.

As you are all well aware, NewAlliance entered this turbulent time in the banking industry in a position of strength. We are well capitalized and have very strong credit quality. These factors have allowed NewAlliance to focus on its core performance, capitalize on our creditors’ distractions, and move business momentum forward. And business momentum is quite strong. Deposits for the quarter were up 1.7% and core deposits increased by $157 million or 6.3%. Loan originations hit record levels at $469 million up 62% from the prior quarter. Mortgage originations were up 80%, consumer lending originations were up 45%, CRE and C&I increased 37%. In total loans outstanding increased 4%. A factor I mentioned earlier warranted that increase in the loan loss provision.

And I’m pleased to mention that NewAlliance opened its first trust office in Fairfield County during the first quarter. Operating under the name Trust Company of Connecticut, NewAlliance has $1.1 billion of assets under management in that division. The new office is located in our Westport branch.

NewAlliance also introduced a new program called Something Extra, our Visa debit card cash rewards program during the second quarter. This program is designed to increase deposit revenues by increasing debit card usage and the initial reaction from our customers has been extremely favorable.

We also expanded our electronic banking capabilities during the quarter by adding functionality to our Internet banking services. Now customers can open CDs and savings accounts and receive e-statements online. Additional enhancements are planned throughout 2008.

And returning to the topic of asset quality. I would like to reiterate the importance of managing credit quality and maintaining strict underwriting standards. I would now like our Chief Credit Officer, Don Chaffee, to provide you with an update.

Donald T. Chaffee

It’s nice to be with everybody. I haven’t listened to all the earnings calls. I wanted to start my presentation with a bit of an upbeat suggestion which is, yesterday I had the pleasure of telling our Board that our total loan portfolio approaches $4.9 billion actually just a little bit shy of $5 billion. When a lot of you joined us back three or four years ago after the IPO, it was at $3,290,000,000. So that overall is a 50-some% increase. If you compound it annually, it’s 11%. So it’s quite an accomplishment that we’re proud of and we hope that at one of these investor conferences we’ll be able to share that good news with you.

Having said that I also want to reiterate that we are not in the subprime business and being an old-fashioned credit guy, we do ask all of our borrowers to verify their income and also demonstrate their assets. Only 1.2% of our portfolio is in residential construction projects. That seems to be the hot button of the day. We also pretty consistently at recent investor conferences particularly the last one have told you that we will not be immune to increasing delinquencies and nonperformers, particularly in the riskier part of our portfolio which is albeit very small there is 1.2% of it. Our nonperforming loans as Peyton mentioned did increase to 53 basis points during the second quarter. However almost all of that was from one particular borrower that during the quarter we put on discretionary non-accrual, a $5.8 million condominium construction loan. And then after more thoroughly reviewing the analysis we wrote down $750,000 of the loan balance. We use the term discretionary because the action that we took occurred when the loan was only 30 days past due. This action is indicative of our philosophy of recognizing and addressing problems as soon as they occur. The project is located in our core market with borrowers that have a long history with the bank, the units are very high quality, and 20% of them have been sold but the sales have slowed due to market conditions. We are currently in the process of attempting to negotiate a loan workout with the borrower. We strongly believe that a loan workout is best for all parties and that’s generally the approach that we take. Overall our delinquencies came in at 89 basis points. We’re very, very happy with the fact that they’re under 1% given everything that’s going on in this market, and we feel quite proud of that as a management team.

Turning to the charge-offs, the net charge-offs for the second quarter were $1.3 million versus the year-to-date number of $1.4 million. $1.3 million annualized is 11 basis points and $1.4 million is only 6 basis points. To have charge-offs of $1.4 million I believe is a phenomenal performance in a portfolio that’s only $5 billion or close to $5 billion. Of the $1.3 million for the quarter $1 million of it was related to two condominium projects, the $750,000 that I just mentioned and a smaller one for $250,000. That project is also well built and we feel that it will sell out in normal conditions. But it is going slow so we decided to take the write down and again we want to negotiate if possible a loan workout.

For the quarter we took a provision of $3.7 million to fully cover the loan growth which as Peyton mentioned you could estimate was approximately $1.2 million of the $3.7 million. The remainder was following a consistent philosophy that we have applied ever since the beginning of our existence which is directionally as asset quality indicates deteriorates even albeit a little bit, the reserve as a percentage of loans and in terms of growth in the reserve should be going up. Our reserve currently stands at $47.7 million or 97 basis points as a portfolio up 9% since year end. We clearly feel that that is adequate based upon the loss experience that we have had and based upon our expectations. We continue to believe that our historical conservative underwriting will serve us well during this challenging period. We continue to have very strong FICOs in and around 750 with LTVs of 50 or below. However, as we have always told you we do not think that we will be immune to the increasing delinquencies and provisions, but we do feel that we will do very well and asset quality will differentiate us from the pack.

Peyton R. Patterson

Moving on to our priorities for the rest of the year, as we have said we are continuing to be vigilant in controlling operating expenses. In that regard we are striving to keep our expenses at the second quarter level throughout the second half of the year. Although our efficiency ratio and ratio of operating expenses to average assets both improved this quarter, we can do better and we continue to work to minimize expense growth as we drive revenues upward.

Regarding the net interest margin, there is still considerable volatility in interest rates, the credit markets, and spreads in customer psychology and in competitive behavior which makes it challenging to predict right now. However, looking at our projections we do not anticipate much movement in the end in the third quarter. We will also continue to maintain our list management focus as we continue to monitor our loan portfolio and aggressively look to successfully work out our nonperforming assets.

In closing I’d like to take this opportunity to discuss our strong capital position. As you know NewAlliance has very strong capital levels with most of our regulatory ratios at around twice the well capitalized levels. At June 30, 2008 NewAlliance Bancshares cut a Tier 1 capital average asset ratio of 11.2% and a total capital to risk weighted assets ratio of 19.7%. We recognize that this is a source of strength in this environment which comforts both our customers and shareholders. It will also allow us to take advantage of opportunities that may present themselves in this unusual and turbulent environment. That being said, we still have the flexibility to buy back modest amounts of shares at these low levels. During the second quarter we purchased 635,000 shares at an average price of $12.74 per share. Buy-backs have continued at a modest level into the third quarter.

This concludes the highlights of the second quarter and we would now be pleased to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ken Zerbe - Morgan Stanley.

Ken Zerbe - Morgan Stanley

Can you just talk about some of the opportunities you’re seeing on the resi mortgage side? I’m more curious in terms of how the loans that you’re putting on your books right now compare to your overall portfolio in terms of spreads, are you getting lower LTVs, I assume you’d be more discerning in terms of the types of loans that you underwrite at this point?

Donald T. Chaffee

Let me take a shot at it. This has been a very pleasant surprise for us and given what’s going on with Fannie and Freddie and Countrywide and all of that, we have found ourselves in a very good position in terms of getting loans at very conservative underwriting in terms of LTVs and FICOs but with widening spreads. So we’ve had internal discussions about the community banking model at least temporarily might be very attractive. So overall that’s been a real pleasant surprise. And on the credit side, we actually have no loosened at all. As a credit officer I really don’t like to loosen and tighten. We stay pretty consistent. We’ve tweaked it a little bit but in general it’s very good results.

Ken Zerbe - Morgan Stanley

In terms of NIM, I know you just said that it’s going to stay roughly flat going into third quarter. Maybe you can just talk a little bit about the deposit competition. I’ve heard some companies mention that deposit competition’s picking up again and people are trying to I guess go higher on CD rates to lock in low funding in anticipation of fed increase. What’s your view on that and what are you seeing?

Peyton R. Patterson

I think as you can see from our second quarter results, I think we’ve done a pretty good job at customer retention but also trying to, which we’ve done successfully, extending the average term of our CDs outward and at lower CD rates and really trying to migrate customers both existing and new into our savings product while also adding a checking account at the same time. And that’s been a very successful strategy for us and we’re going to continue with that probably throughout the end of the year. I would also comment that with some of our competitors’ disruptions and concern on the part of I think consumers just generally in the country, we’ve seen a flight to quality and are really starting to see customers given FIDC concerns or confusion come to NewAlliance Banc being viewed really as sort of a safe haven.

Operator

Our next question comes from Christopher W. Marinac - FIG Partners LLC.

Christopher W. Marinac - FIG Partners LLC

My question is about the loan to deposit ratio and to what extent that will be increasing further from where it is today and then also just a related question about borrowings and how you’ll utilize borrowings versus other [inaudible]?

Merrill B. Blanksteen

The loan-to-deposit ratio we believe had peaked for us at least in the intermediate term. As you know we had deposit outflows in the first quarter which is part of the strategy to improve the NIM. One of the reasons why we wanted to get restored deposit growth in the second quarter was to try to control the growth in the loan-to-deposit ratio. So we think at this point that’s probably back on its way down. But you can see we have used some borrowed money throughout the year and it has been a very efficient way from a margin perspective to fund loan growth and to replace deposit outflow. But the rate of growth in borrowed money slowed down significantly in the second quarter and we expect to be able to continue to rely only small degrees on more borrowed money the rest of the year.

Christopher W. Marinac - FIG Partners LLC

And just separately, have you noticed any change in customer behavior whether it’s with NewAlliance or just in general in your footprint? And the last several weeks has there been more discussion about bank safety and soundness?

Peyton R. Patterson

I was really alluding to that a little bit before. Generally speaking actually the State Banking Department came out a couple of weeks ago really attesting to the safety of the Connecticut banks, the state chartered Connecticut banks, and obviously we would come up at the top of that list. I would say what we are seeing, and I think that’s because of the press it’s been getting on the news, is more of a focus on FDIC. And I think what that comes down to in terms of consumer education is reinforcing awareness of what your options are in terms of coverage. But we’re really using it to our advantage to attract new customers into the bank.

Operator

Our next question comes from James Abbott - Friedman Billings Ramsey & Co.

James Abbott - Friedman Billings Ramsey & Co.

I was wondering if you could give us a sense on the loan growth pipeline and then some sense on the outlook. Are you still accepting a lot of applications on the residential side? I think you may have vacillated a little a bit around that issue as to whether you continue to press forward with it and I wanted to understand where you are.

Merrill B. Blanksteen

The pipeline is still good but we have decreased the pipeline somewhat. As we mentioned a moment ago we are concerned with managing our loan-to-deposit ratio. There are a lot of good loans available, available pricing is attractive, and so it’s allowed us to get quite selective in the loans and as a result we have actually improved our pricing somewhat with our competitive position to deliberately slowdown that pipeline a little bit.

Peyton R. Patterson

And I would just also add that as you saw in the second quarter, we saw a nice increase in commercial and C&I. We maintain our discipline around our pricing and credit but obviously that is a market that’s important to us and we continue to see nice volumes there.

James Abbott - Friedman Billings Ramsey & Co.

Can you give us a sense as far as the growth in the residential portfolio this quarter? What maybe a typical loan-to-value would be and how wide that sell curve might be for your outer limits on loan-to-values and maybe debt-to-income ratios?

Donald T. Chaffee

I can tell you that we just reviewed all of our underwriting on residential with the Board Loan Committee and we decided that we didn’t need to change much; we just needed to tweak it a little bit. We pulled in some of the LTVs on home equities but in general what we have found and those of you who’ve been involved in credit is that your guidelines often aren’t the same thing as the through-the-door population. The through-the-door population oftentimes is better. But we see for the most part LTVs again 60 and below. I mean I’m not saying that we don’t do some 80s and we see debt ratios pretty much below 38 although we allow them to go to 42. And if you know mortgage underwriting, a lot of folks went way higher than that. For us to go above 38 they have to have three compensating factors and so if we see the compensating factors, then we’ll do it. But I’m very satisfied with the quality of what’s going through the door.

FICO scores. FICO scores continue to be 750+ for the most part. We do rescore every quarter as I think we mentioned at the last investor conference. One of you guys said you’d like to see that on a trend basis. We’re prepared to do that at the next investor conference. The averages have stayed the same. You’ll find that as many people moved up that moved down but we do have a watch list of any loans that have deteriorated so we can start more aggressively calling them to see if there’s any problem. But overall we think we have very good loan-to-value and that we don’t expect a lot of losses. We only have 35 foreclosures right now and we don’t expect to lose anything on those 35.

James Abbott - Friedman Billings Ramsey & Co.

That’s excellent to hear. I don’t think most residential lenders do rescore like that, so that’s obviously nice to hear.

Switching gears real quickly because my time is running out to the provision of $3.7 million. So $1.2 was allocated for portfolio growth, about $1.3 million was the net charge-offs, so that leaves about $1.2 million left over?

Donald T. Chaffee

Yes.

James Abbott - Friedman Billings Ramsey & Co.

Would that be allocated to the nonperforming assets that came onto the balance sheet? Is it more of a macro factor adjustment?

Donald T. Chaffee

It’s both. As you can imagine in our small residential construction portfolio at 1.2% which you guys are going to get tired of hearing me say, so I apologize, there have been some downgrades. But we only had, if you add the two loans together that I talked about, it was $5.8 million and $2.2 million for a total of $8 million. So some loans did get downgraded but primarily we have followed this philosophy which is a little bit painful that when the delinquencies are going up, even though they’re going up from such a low base, Peyton wants to have a philosophy where we’re increasing the reserve and we do have a small amount of unallocated between 3% and 5% because you’re allowed to do that by regulation because they recognize that it’s an art not a science. We are saying that we want that number to drift up because we’re uncertain as to where the economy’s going to go.

Operator

Our next question comes from Damon DelMonte - Keefe Bruyette & Woods, Inc.

Damon DelMonte - Keefe Bruyette & Woods, Inc.

On the loan growth could you clarify what percentage was purchased and what was self-originated?

Merrill B. Blanksteen

I think less than 10% was purchased.

Damon DelMonte - Keefe Bruyette & Woods, Inc.

Historically your net charge-off rate has been in the single digits and the increase to 11 basis points is not obviously too concerning but how are you guys kind of looking at a normalized rate going forward? Do you think that a low single digit charge-off rate is reasonable or do you think that exposure to the economic conditions could see a trend higher than that?

Donald T. Chaffee

Let me tell you that I took a lot of ribbing after the first quarter when it was 1 basis point. Someone thought that I could have at least rounded it up to 2. You mention 11 but 11 just happens to be the annualization at the quarter. If you annualize the year-to-date at June, it’s 6. Phenomenally low. My expectation will be that delinquencies will move up in the trading range and that number will move up in a trading range too but we don’t’ see anything right now. All the portfolios if I were to go over with you like I do in the investor conferences, delinquencies for each one of the portfolios are outstanding. Construction is at 4.4% which overall we think is good but I do think that charge-off line will creep up. So that’s my answer.

Damon DelMonte - Keefe Bruyette & Woods, Inc.

Can you tell me how that translates into a provision in the reserve level? If I heard you correctly, you’re comfortable with it on the 97 basis reserve level so we should look at the provision to sort of match charge-offs going forward?

Donald T. Chaffee

Well you have to be very careful from an accounting point of view. Merrill you might want to make sure I get this right, but GAAP does not allow you to just replace charge-offs with provisions because in theory if you charge a loan off, it’s gone. So you don’t really have to reserve for it anymore but the analysts such as yourself wisely use it as a guideline. In general when things are bad and nonperformers are going up it’s not a bad guideline. But GAAP really calls for is you have to be able to identify the loss and quantify it. In my judgment because of what’s going on in the economy it’s more probable than not that we will be slowly increasing the reserve levels for the intermediate period of time. Now if the economy improves as some people think sooner, then we’ll be able to reverse that course. But I’m very comfortable now that we have a reserve that passes both the muster of the FCC and the regulators.

Damon DelMonte - Keefe Bruyette & Woods, Inc.

Merrill, could you just remind us, do you have any pooled trust preferred securities in your securities portfolio?

Merrill B. Blanksteen

Yes we do have some pooled trust preferred securities. They’re rated AA and AAA.

Damon DelMonte - Keefe Bruyette & Woods, Inc.

And how much?

Merrill B. Blanksteen

I think approximately $10 million or less.

Damon before you go I want to correct one other answer. Our purchased loan portfolio declined during the quarter.

Operator

Our next question comes from Collyn Bement Gilbert - Stifel Nicolaus & Company, Inc.

Collyn Bement Gilbert - Stifel Nicolaus & Company, Inc.

Most of my questions have been answered. Don, just a question in terms of terms of your posture which is obviously I think a very prudent one to be conservative in this environment and your exposure to residential construction is limited, but have you gone through and tried to assess kind of the potential trickle down effects of construction as it would hit your C&I portfolio?

Donald T. Chaffee

Yes. In fact I’ll tell you Collyn that we review the construction portfolio every single month and about six months ago my boss suggested at a Board Loan Committee that we wanted to look at the entire C&I portfolio that is housing related. So you’ll have things like fuel/oil dealers, contractors, trades, plumbers, electricians, etc. Our overall C&I portfolio is at a delinquency rate of approximately 1.5% and low and behold the housing related is a little bit higher at 2.5%. I derive a lot of comfort from that. I can also tell you that we’re now scoring the C&I portfolio with the proprietary database of other small business lenders like B of A. We’re on the Board and we rescore that as well and it reports on their late payments to financial institutions as well. We’re pretty happy with it but we do think that it’s going to be a struggle for some of these customers, but we watch it very closely.

Collyn Bement Gilbert - Stifel Nicolaus & Company, Inc.

Just in terms of, it’s fairly insignificant, but the residential constructions that went on MPL this quarter. Did you allocate a specific reserve to that?

Donald T. Chaffee

Yes. Actually what we do as a matter of methodology is we look at it every month as I told you and then once a month we look at every particular thing about a project that you’d want to see in terms of velocity of sales, what’s happening to prices, what does that do to their current projection versus the original pro forma. And if we see that there is an impairment and if the technical definition is the FASB 114 that is delightful to read, but when we identify that we think there’s going to be a loss, we actually have to do a FASB 114 analysis and we add all that up and that gets put into the reserve. So that’s basically how it works.

Operator

Our next question comes from [Theodore Acovalis - Granada Capital].

[Theodore Acovalis - Granada Capital]

A couple of questions with regard to your CDs because I’m interested in trying to figure whether or not the interest rate spreads will be able to continue to improve. Item one is, what’s the average length of US CDs at the moment?

Merrill B. Blanksteen

About 11 months.

[Theodore Acovalis - Granada Capital]

Over the next quarter and following quarter, roughly what percent are going to be repricing?

Merrill B. Blanksteen

About 40% of them actually reprice in the next three months.

[Theodore Acovalis - Granada Capital]

Can one logically assume that the positive trend in the interest rate spread will continue through the next quarter?

Merrill B. Blanksteen

As we said our projections indicate some stability in the margin going ahead. There is definitely less of a pickup on maturing CDs from the new rate compared to the maturing rate than we saw earlier in the year. The CDs maturing right now have lower rates than the CDs that matured earlier in the year.

Operator

Our next question comes from [Brian Hegler - Kennedy Capital].

[Brian Hegler - Kennedy Capital]

I’m assuming the two condo deals that went on nonperforming this quarter were included in the 1.2% that you keep referring to which equates to about $60 million. How much of that $60 million is condo related?

Donald T. Chaffee

Let me give you the specific number. It’s $52 million and that’s because there was a write down also in June on the two projects that I mentioned. I don’t have the exact condo number but about a week ago when I looked at it, it was approximately $20 million outstanding and there was some an exposure commitment up to $30 million but right now they really can’t draw to the commitment because the contracts aren’t there. We do try to limit as best we can the speculative nature of this and limit the condominiums to just a phase at a time. And we do not do high rise condominiums because as a credit officer I’ve learned that you’ve got to go ahead and build the whole darn building if something goes wrong. So we have been able to limit the exposure. But on the two that you talked about, the grand total was $8 million and we did write down $1 million. And the total residential builder portfolio is exactly $52 million.

[Brian Hegler - Kennedy Capital]

You mentioned your expenses were a little bit higher. It sounds like you ran some sort of deposit campaign during the quarter that looked to be fairly successful in migrating your deposits in the lower costing funds. Can you just talk about maybe what offer you ran and if that’s going to continue into the third quarter?

Peyton R. Patterson

I just want to clarify that on a linked quarter basis overall non-interest expenses were down by $927,000. Advertising as a line item was up for the reasons you suggest because of the deposit campaign we were running. The success that we’ve had with this savings campaign has obviously given spreads and market share opportunities. It’s likely to continue. We want to continue to focus on generating savings accounts and our cash rewards program which should help with the income. While we saw a slight drop in annuity revenues in the second quarter, we’re really pretty optimistic about some programs we have in place so that we are both being able to increase deposits and focus on annuity sales. However, we’re being pretty disciplined about the year-end marketing number. We knew we had to do some catch up in the second quarter but we’re going to be pretty disciplined given some momentum we have just on the sales front at this point.

[Brian Hegler - Kennedy Capital]

Peyton if you could talk about your appetite if any for potential acquisitions in this environment or are you seeing more opportunities or expect to see more opportunities?

Peyton R. Patterson

I would characterize the M&A environment as sort of falling into three areas. One, we are starting to see a little bit more buzz if you will in terms of the traditional bank deal. And clearly we look at those but want to make sure if were to do anything at whatever point in time that we have a really good handle on the asset quality and the mark-to-market values and that it fits and was accretive to earnings. So that’s sort of a continuing process. The second category which I think is obviously opportunistic is in the area of FDIC assisted deals and I think we may start to see some opportunities there. And then lastly, we are always very much interested in buying branches. And to the extent a number of the national players are looking to divest branches, we would clearly be open to such a purchase again being able to buy those deposits, expand our footprint at a good IRR.

Operator

Our next question comes from Matthew B. Kelley - Sterne Agee & Leach, Inc.

Matthew B. Kelley - Sterne Agee & Leach, Inc.

To follow up on a question earlier when you quantified the C&I nonperforming ratios in terms of housing related versus the entire portfolio at 1.5%, what’s the total size of the housing related C&I that you identified in terms of dollar amount?

Donald T. Chaffee

I don’t have it off the top of my head. I can tell you that we were surprised that it was so small. It was not a large number. I wish had the presentation in front of me but the best I can tell you is it was not a significant portion.

Matthew B. Kelley - Sterne Agee & Leach, Inc.

On home equity, any changes in consumer behavior, draw downs on lines of credit, delinquency trends, anything?

Donald T. Chaffee

Yes, I can tell you a couple things that are good. The home equity delinquencies have improved. The home equity loans are only 20 basis points and the lines are I think 55, down from a high of 90. We track very carefully from an account monitoring point of view any usage on lines above 60% to 70% particularly if we think it’s going to pay a first mortgage. We have a separate watch file just for those. Our usage is actually up from 40% to 41% so we couldn’t be happier with our $600 million in home equities. It’s been a wonderful portfolio for us, the FICO scores remain strong, and the LTVs remain low. We do not do piggy-back loans. We really don’t like doing loans where somebody else has a situation where the total debt is too much. So we’re happy with it.

Peyton R. Patterson

And Matt, just to reinforce, we also don’t do broker-related home equity loans and these loans are all done really through our branches and in our footprint.

Matthew B. Kelley - Sterne Agee & Leach, Inc.

On overall credit trends, any individual markets or micro markets that you guys are becoming more concerned with throughout the New England area that you generate business from? Any particular areas, Eastern/Western Mass, Rhode Island, parts of Connecticut?

Merrill B. Blanksteen

One of the things that we’ve said frequently and it is coming home to bear, most of our core market did not appreciate as rapidly as many of the other markets and therefore we’re not seeing depreciation. Fortunately in Fairfield County we kept our LTVs very, very low. As a credit team we’ve always been very hesitant about restaurants, golf courses, hotels, motels, retail strip malls. If you look at our portfolio diversification chart, you’ll see it’s pretty balanced. We really like the apartment buildings we have now but I do think that New England has been a little bit on a pedestal but it’s going to catch a bit of a cold as well because of what’s going on with the economy. But in our core market I think we’re in a better place right now.

Matthew B. Kelley - Sterne Agee & Leach, Inc.

Any particular areas though that you think could be catching a cold first?

Merrill B. Blanksteen

No, not really.

Matthew B. Kelley - Sterne Agee & Leach, Inc.

To follow up on a question earlier about repricing of liabilities, what about on the borrowing side the amount that matures and at what rate?

Donald T. Chaffee

The borrowings are fairly long duration as we’ve said before. Less than 15% of those mature in the next three months.

Operator

That does conclude today’s question and answer session. I would like to turn the conference back over to Ms. Patterson for any closing remarks.

Peyton R. Patterson

I want to thank everybody for joining us today. Obviously we are very focused on fundamentals and really maintaining the strong credit quality that we have for the remainder of the year. I do want to clarify that if anyone wants to call offline to speak with me or to Merrill or to Don on any issues, please feel free to do so. And if not, I’m sure we’ll be seeing you out on some road shows and we look forward to talking to you at the third quarter call. Thanks very much for joining us.

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