Horizon Financial Corporation F2Q09 (Qtr End 09/30/08) Earnings Call Transcript

Horizon Financial Corporation (HRZB)

F2Q09 (Qtr End 09/30/08) Earnings Call Transcript

October 23, 2008, 4:30 pm ET

Executives

Lawrence Evans – Chairman

Rich Jacobson – CEO and Interim CFO

Dennis Joines – President of Horizon Bank and COO

Steve Hoekstra – EVP and Commercial Division Manager

Analysts

Kristin Hotti – Howe Barnes Hoefer & Arnett

Lou Cosser [ph] – D.A. Davidson

Ross Haberman – Haberman Value Fund

Presentation

Operator

Good morning, ladies and gentlemen. Welcome to the Horizon Financial conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions.

Before we get started, the management has asked me to remind you that this call may contain forward-looking statements that are within the meaning of the Federal Securities Safe Harbor laws. Actual results and timing of certain events could differ materially from those projected in any forward-looking statements due to the number of factors.

Specific factors include, among others, changes in the level and trend of loans, delinquencies and write-offs, results of examinations by our banking regulators, our ability to manage loan delinquency rates, the ability to successfully extend existing relationships, depositing, pricing and ability to gather low cost deposits as the new markets and expansion plans, expense management and deficiency ratio, spending or maintaining the net interest margin, interest rate risk, the local and national economic environment, and other risks and uncertainties discussed from time-to-time in Horizon's financial filings with the Securities and Exchange Commission.

Accordingly, undue reliance should not be placed on forward-looking statements and these forward-looking statements speak only as of the date of this call. Horizon Financial is under no obligation to update this information as further events or developments take place that may change these forward-looking statements.

Investors are encouraged to read the SEC report of Horizon, particularly its Form 10-K for the fiscal year end March 31^st 2008 for meaningful cautionary discussion why actual results may vary from those anticipated by management.

And now I would like to turn the conference over to Mr. Evans, Chairman of Horizon Financial Corporation. Please go ahead.

Lawrence Evans

Thank you, Marissa. Thank you for joining us for our Second Quarter Fiscal 2009 Conference Call. With me today are Rich Jacobson, our Chief Executive Officer and interim Financial Officer; Dennis Joines, President of Horizon Bank and Chief Operating Officer for the Company; and Steve Hoekstra, Executive Vice President and Commercial Division Manager.

As you know, I continue to serve as Chairman of the Board and will continue to be involved in the bank's operations for a few more years. Since Rich was promoted, we have been in the market for a Chief Financial Officer and I'm happy to report that a very experienced banking professional, currently a CFO at another publicly traded Northwest bank has accepted our offer to join Horizon. We anticipate being able to announce details of this tomorrow after his current employer puts out a news release of his departure.

With that said I'd like to get right into an update of the local economy and then turn the call over to Rich, who will review our asset quality. Dennis will then go over the income statement and the balance sheet before we open it up to questions.

While the national economy is changing daily, let me provide you with perspective of our local economy. It was only back in March of this year when Moody's Economy.com reported that Washington State was in an expansion mode, while California was in a recession. It remains unclear whether the current economy meets the economist definition of a recession, a decline in economic activity for two quarters.

Puget Sound Economics Forecaster in its October 10th report on the monthly leading index reported the following conditions. In August, the monthly Puget Sound index for leading economic indicators increased 1.8% to 1.11% with 1987 equaling 1.0%. This interrupting a persistent downturn trend over the last year.

Four components of the composite index improved while three components worsened. Help Wanted Ads rose from a record low in July. Housing permits advanced because of a large jump in multifamily permits offsetting yet another decline in single family permit. Initial claims for unemployment insurance fell after soaring in the previous month.

The Boeing backlog delivery ratio was also moved higher, but that was no surprise. On downside were a decline in the length of the manufacturing work week, slippage in the durable goods spending and a narrowing of interest rate spread.

From our point of view, business owners and workers in parts of the country have for months weathered recession like conditions. That being job losses, home foreclosures and slumping consumer and business spending. And yet, most areas in Western Washington are still doing relatively well. Predicting what the future holds, particularly in light of the turmoil in the global and national economic financial markets is difficult to predict.

September's preliminary unemployment rate for Washington (inaudible) at 5.8% continues to look better relative to the U.S. unemployment rate of 6.1%, according to the Washington State Employment Security Department. Hardest-hit sectors were government jobs, with 79% of their 11,600 jobs lost in September coming from local governments and 19% coming from state jobs. The goods producing sector shed 3,600 jobs, and commercial construction lost 2,200 jobs, or a minus 1.1%.

Puget Sound unemployment rate was 4.6% in September, a slight improvement for August, when the rate was 4.7% compared to 3.7% in September of 2007. These rates are seasonally adjusted. Seasonally unadjusted employment rate for September for Bellingham was 5.2%, up from 3.9% a year ago.

The Mount Vernon Anacortes area in Skagit County was 5.7%, up from 4.1% a year ago. The unemployment rate in Tacoma, which is Pierce County's largest city, was up 5.9% from 4.5%. Unemployment rate in Snohomish County rose to 5.2% from 3.9% last year. King County continues to have the lowest unemployment rates in Western Washington at 4.6%, up from 3.7% a year ago.

And talking about employment, I would be remiss if I didn't comment on the Boeing machinists strike. According to the Everett Herald recently, the Machinists Union, IAM – and they went on strike September 6. They are total of 27,000 machinists with 24,000 in King County and Snohomish Counties. The other 3,000 are in Wichita. Average wages for the machinists range about $65,000 with overtime. So a month long strike is estimated to take out about $130 million from the local economy in lost wages.

Despite the strike, Boeing's backlog continues to rise, with another 100 airplane order for the 787 Dreamliner from American Airlines this last week. We know that eventually the strike will end, and Boeing's business remains healthy. But until that time, the economic impact of the strike cannot be discounted.

Switching to our housing markets in September, some absorption of the excess inventory levels in the Northwest. The following stats for September of '08 compared to September of '07, according to the Northwest Multiple Listing Service, and inventory levels according to RealSTATs, in King County, active listings were up 6.2%, pending sales were up 4.2%, and median price was down 3.7%, with 8.6 months worth of inventory on the market. In Snohomish County, active listings were up 1.5%, pending sales are down 6.8%, and median prices are down 7.7%, with 15.6 months worth of inventory on the market.

In Pierce County, active listings were down 11.2%, pending sales are up 21.8%, and median prices are down 10.4%, with 9.1 months of inventory in the market. In Skagit County, active listings were up 4%, pending sales were down 19.9%, and median prices are down 12.8%, with 10 months of inventory on the market. And in Whatcom County, active listings are down 12.2%, pending sales are down 2%, and median prices are down 4.5% with 7.7 months of inventory on the market.

All inventory levels are down month-over-month with the exception of Whatcom County, which decreased 0.2%. We continue to believe that the outlook for the next several months will show only modest improvements in these inventory levels.

With that, I'll turn it over to Rich, who will talk to you about our asset quality and what happened in the second fiscal quarter of 2009.

Rich Jacobson

Thanks, Larry. Obviously, the housing market in the Pacific Northwest has not been immune to the downturn we've seen in many other parts of the country. And we are indeed feeling the impacts of the slow regional housing market.

Since we last spoke, the global financial markets have gone through major turmoil with the Federal government taking unprecedented action to invest in Fannie Mae, Freddie Mac and AIG, to name a few. Closer to home, the FDIC facilitated the sale of Washington Mutual to JP Morgan Chase. None of these events were something any of us would have expected as recently as a year ago, but here we are.

There are two major recent government actions that were enacted to bolster the confidence of consumers and businesses that we believe are important enough to note here. First, the FDIC raised the limits on deposits to $250,000 for all accounts, and to an unlimited amount on non-interest bearing transaction accounts.

This increased insurance protection has been well received by our customers, and I believe that it was an important step in reassuring the general public that their funds are safe regardless of where they bank. While we did see some activity with consumers bringing their accounts to us from other institutions, none of us were happy with the amount of fear and unrest we were seeing with customers because of the global financial crisis.

The second action is the Treasury Department's capital purchase portion of the Troubled Asset Relief Program. Again, we believe that the recapitalization of the banking system in an orderly systematic way will be good for the overall economy and the global banking system. What amount of funding will flow to community banks is not clear at this point, but I suspect that most banks are actively investigating the possibility of participating in this program. In the current economic environment, capital is more important than ever.

On the topic of capital, it's worth noting that Horizon remains well-capitalized with equity to assets of 8.4% and a total capital to risk adjusted asset ratio of 10.4%. Both of these ratios remain above the well-capitalized thresholds.

Our liquidity is strong as well. Since March 31st, we have paid down our wholesale borrowings by approximately $40 million, freeing up additional liquidity if needed. In addition, we have a good mix of funding sources, solid core deposits, and a liquid investment portfolio.

In short, we have adequate resources to meet the needs of our customers. But I suspect that the most important part of our discussion here today revolves around our asset quality, and specifically, the health of our construction and land development portfolio.

We reported the loss in the quarter of $4.6 million, which included a $12 million provision for loan losses. This quarter, we saw a substantial increase in our nonperforming assets with an additional $42 million going into non-accrual status, bringing total nonperformers to approximately $80 million. Almost all of the new loans on the non-accrual status are construction and land development loans, and all of them are within our banking footprint.

We charged off a total of $5.6 million during the quarter. So at the end of September, the ratio of nonperforming assets to total assets was 5.53%. With our increased provision, the reserve for loan losses increased to $25.6 million or 2.06% of net loans receivable.

As you can see from the release, our commercial and multifamily real estate loans are performing well as are the C&I loans in our portfolio. The largest part of the increase is for the land development and residential spec construction projects.

The release provides the details on the geographic distribution of our nonperforming assets. Of our problem loans, 32% are in Snohomish County, 27% are in Pierce County, and 29% are in King County. 11% of our nonperformers are in Whatcom County and only a nominal amount is in Skagit County.

Unfortunately, we are also seeing an increase in delinquencies, with those loans 30 days to 89 days past due at September 30th totaling approximately $46 million, compared to $13.4 million at June 30th and $7 million at September 30th a year ago. This, of course, was another contributing factor to the increased provision expense for the quarter.

We are updating appraisals regularly and working with our borrowers to maintain performance. In some cases, we are asking for additional collateral and identifying other sources of repayment. While I would like to tell you that we are nearing the end of this cycle, the evidence is simply not there yet.

Because most of the nonperforming assets are secured, we have substantial collateral backing these loans. We believe we will be able to collect most of the balances of these debts. As we get new appraisals and see properties in the markets sell, we will update valuations quickly. The charge-offs for the quarter were primarily the result of such updated valuations.

We are placing a great deal of attention on working through the challenges in our construction and development portfolio. It's the focus for the majority of our lending staff right now. And as we said in the release, we have a very long history of doing development loans. So the expertise in-house is an asset in these difficult times.

On a related note, we do have a land development subsidiary, which might provide for an opportunity to hold certain properties, and our own inventory to be developed in the future when conditions improve.

It's very likely that we will have little or no growth in the loan portfolio this year as our resources are focused on improving asset quality. We are of course continuing to serve our existing customers because of the excellent relationships we've established with them over the years. However, we simply aren't pursuing aggressive growth in the portfolio.

With that, I will turn it over to Dennis to review the income statement and balance sheet.

Dennis Joines

Thanks, Rich. As Rich noted, we took a $12 million provision for loan losses in the second quarter, generating a loss of $4.6 million or $0.39 per share, compared to earnings of $2.0 million or $0.17 per diluted share in the linked quarter, and earnings of $4.9 million or $0.40 per diluted share in the second quarter of fiscal 2008.

For the first half of fiscal 2009, we lost $2.6 million or $0.22 per share compared to earnings of $9.9 million or $0.81 per diluted share a year ago. For the second quarter, net interest income before the provision was $10.9 million, down 3% on a sequential quarter basis and 22% year-over-year.

Following the provision, net interest income was a negative $1.1 million compared to a positive $8.2 million in the linked quarter and a positive $13.1 million in the second quarter of fiscal 2008. Interest income was down 20% year-over-year, while interest expense was down 18% compared to the year-ago quarter.

Second quarter non-interest income was $1.5 million, down 35% from the prior quarter and down 8% from the year-ago quarter. There were a few things in the non-interest income category that were unusual this year. In the June quarter, we booked a $579,000 gain on investment sales, including selling a portion of our Freddie Mac common shares. We carry them on our books at a split adjusted price of $0.33 per share and we still have 19,800 shares. So our cost basis is approximately $6,500.

This quarter, we realized a $777,000 loss on the AMF mutual fund redemption as noted in the release. With the turmoil in the CMO markets this year, the funds stopped redemptions of cash. We elected to take the redemption in-kind distribution this quarter, because we felt it was more appropriate to hold the individual securities instead of continuing with the mutual fund. We also received death benefits proceeds on a bank-owned life insurance policy that added $767,000 to other income.

Through June 30th, we saw 225 basis points in the prime rate reductions this year on top of the 100 basis point cut in 2007. So we are managing through the more than 300 basis points reduction in short-term interest rates over the past (inaudible). As a result, our yield on earning assets fell 28 basis points in the quarter, compared to the linked quarter, and 240 basis points from the second quarter of last year.

Our funding costs are much slower to move with interest rates. So our cost of funding was down 18 basis points from the June quarter and 110 basis points from a year ago.

The net interest margin for the second quarter fell 14 basis points to 3.26% from the prior quarter and was down 137 basis points from the same quarter one year ago. And as we mentioned in the release, 51 basis points of the margin decline for the quarter was due to the interest reversals in lost interest on nonperforming loans.

Non-interest expense was $8.1 million for the second fiscal quarter, up 7% from the prior quarter and 9% from the year-ago quarter. Compensation costs were down 4% in the linked quarter as we are closely managing these expenses, which included the elimination of the companywide incentive plan for the current fiscal year.

Most of the growth in the overhead came in the category of other expenses. Those are primarily because of the costs associated with managing our nonperforming loans for things such as appraisals, attorney's fees, et cetera.

Also impacting this area was a $170,000 increase in the FDIC insurance expense recognition compared to the prior quarter. Our one-time assessment credit for previous payments into the system was depleted at the end of June. So we will still have this expense moving forward.

Turning to the balance sheet, total assets were $1.45 billion at September 30th 2008, essentially unchanged from June 30th 2008 and compared to $1.35 billion at September 30th 2007. Due in part to the continued funding of existing commitments, our net loan portfolio grew $93 million on a year-over-year basis but was down $6 million compared to June 30th 2008.

Demand for residential mortgages was down in the September quarter. Most of our production is sold into the secondary market and we reduce our holding of single-family mortgages from the June quarter by $9 million. As we have said before, we do not originate subprime paper, and all of our loans are underwritten to prudent guidelines.

During the September quarter, commercial real estate decreased $10 million, C&I increased $6 million, and commercial construction and land development increased $12 million as existing commitments continued to be funded. Deposits were up 15% year-over-year to $1.1 billion.

It is worth noting that $26 million of the brokered CDs listed in the release represent a shift from our retail CD deposit base into the CDARS product offer through the Promontory Network. Finally, shareholder equity is down 5% year-over-year, with book value totaling $10.21 per share and tangible book at $10.15 per share.

With that, I will turn it back over to Rich.

Rich Jacobson

Thanks, Dennis. Before we open the call for questions, I'd like to say a word about our recent dividend declaration. As we stated in the dividend release, we view cash dividends as very important to our shareholders. And we declared a cash dividend this quarter of $0.05 per share, which was a reduction from the previous level of $0.135 per share. This is approximately $1 million lower than in the previous quarters, for a $4 million annualized reduction for the company.

Capital preservation and capital strength are of course very important. We'll continue to carefully review dividend payments in light of our capital requirements, our liquidity, the needs of our shareholders, the requirements of our regulators, and all the other factors that go into declaring a dividend.

So with that, we are ready to open it up for questions, Marissa.

Question-and-Answer Session

Operator

Our first question comes from the line of Kristin Hotti with Howe Barnes Hoefer & Arnett. Please go ahead.

Kristin Hotti – Howe Barnes Hoefer & Arnett

Hi, yes, good afternoon.

Dennis Joines

Hi, Kristin.

Kristin Hotti – Howe Barnes Hoefer & Arnett

I think you said, Rich, that the risk-based capital, total risk-based capital ratio for the holding company was 10.4 something percent?

Rich Jacobson

That's actually for the bank.

Kristin Hotti – Howe Barnes Hoefer & Arnett

For the bank, okay. But it was 10.40%?

Rich Jacobson

Yes. It's 10.4%, whether it was 10.36% or 10.43% rounded, I don't have that, but 10.4%.

Kristin Hotti – Howe Barnes Hoefer & Arnett

Okay. What about for the holding company level?

Rich Jacobson

We don't have that handy here. We'll get that for you, Kristin.

Kristin Hotti – Howe Barnes Hoefer & Arnett

Okay. Terrific. And then, you did mention the 30 days to 90 days delinquencies already which was my next question. With respect to the TARP program, have you – I think we're all sort of grasping at (inaudible) information that are coming out of the regulatory agencies. Have you looked into that in great detail yet? Or have you had any further pieces of information regarding potential eligibility? Or are you not interested? Or just your feedback on that.

Rich Jacobson

Kristin, I think it's too early to tell how that could fit into the program. But we, like most everyone else are staying abreast of all of the things that seem to be coming out almost daily, as far as updates on the program. So we will continue to look at it, but it's too early to tell whether that's something that's going to be part of our plans.

Kristin Hotti – Howe Barnes Hoefer & Arnett

With respect to – just one more question, if I might. With respect to the increase – the elevated provisions in the quarter, how much of that was specific reserves for the increase the NPAs? And how much was general?

Rich Jacobson

It actually all goes into one big –

Kristin Hotti – Howe Barnes Hoefer & Arnett

It's all one general case. Yes.

Rich Jacobson

– Kristin. So the other thing that came into play there was writing off $5.6 million. But then as we work through the analysis, it really highlights the substandard assets, the nonperformers. So they certainly play a big part in that. But as we also mentioned, those levels of delinquencies –

Kristin Hotti – Howe Barnes Hoefer & Arnett

Delinquencies.

Rich Jacobson

–- contributed.

Kristin Hotti – Howe Barnes Hoefer & Arnett

Just one more question. Is your safety and soundness exam now completed?

Rich Jacobson

Yes. They had their exit review on October 2nd.

Kristin Hotti – Howe Barnes Hoefer & Arnett

October 2^nd. Okay. Alright. I'll let somebody else ask for questions then. Thank you.

Rich Jacobson

Thank you.

Operator

And our next question comes from the line of Lou Cosser [ph] with D.A. Davidson. Please go ahead.

Lou Cosser – D.A. Davidson

Good afternoon, guys.

Rich Jacobson

Hello, Lou.

Lou Cosser – D.A. Davidson

Just filling in for Jeff. Just a few quick questions. I didn't catch what was in the other expenses line. Can you repeat that?

Dennis Joines

Yes. Other expenses, we showed for the quarter looks like about $2.1 million. And what's included in that is we had a $335,000 loss on REO, some collection expenses with our NPAs and delinquency of about $61,000 legal expenses of about $39,000 and then we also had that $170,000 of FDIC expense as well and then there is some other nickel and dime things in that as well, Lou.

Lou Cosser – D.A. Davidson

Great. The FDIC thing is the one thing I missed. Thank you. And I was wondering if you guys have a rough breakout of kind of your loans by county, not necessarily, construction loans, but just kind of a rough breakout, especially in like Snohomish and Pierce and King.

Dennis Joines

Yes, we certainly can provide that to you. As far as looking at our development construction concentration, we have about 10% of it here in Whatcom County, another 10% at Skagit Island County, King County 21%, Snohomish County 30%, Pierce County 24%, and we have a little bit down in Thurston County of about 5%.

Lou Cosser – D.A. Davidson

Great. And can you just kind of briefly run through the quarter? How was net interest margin kind of trending on a month-by-month basis if you could?

Rich Jacobson

Lou, that's – we continue to get squeezed on the margin side. The extent of our lift, if you would, from deposits repricing really is behind us now, with the increased pressure for the CD dollars, or attracting any retail dollars these days. Much of that – we just aren't seeing the benefit from that any more. That really turned probably in early September. With about 60% of our loans tied to prime, most of that hit occurred prior to the September quarter. We just aren't getting the benefit any longer on the liability side. So that has been trending down and I certainly don't expect that to get better with the recent additional 50-basis point cut. So it has been steadily trending down, albeit at a lower rate each month, Lou.

Lou Cosser – D.A. Davidson

Okay. Great, that's all I had. Thanks, guys.

Rich Jacobson

Thank you.

Operator

(Operator instructions) Our next question comes from the line of Ross Haberman with Haberman Value Fund. Please go ahead.

Ross Haberman – Haberman Value Fund

How are you, gentlemen?

Rich Jacobson

Hey, Ross.

Dennis Joines

Hey, Ross.

Ross Haberman – Haberman Value Fund

I want to ask you about these nonperformers. You were very good to break it out by category. You charged off – was it $5 million, I think it was this quarter?

Rich Jacobson

Right.

Ross Haberman – Haberman Value Fund

$5.5 million. Could you give us a sense of – was that – what that was in terms of, say, one to four more land or so forth? And when you sold your land or one to four specs, what sort of average cents on the dollar are you getting for your one-to-fours your land, if you can generalize in that way?

Dennis Joines

Of the charge-offs, we had a condo project down in King County that amounted to about $3.6 million. And the rest are single family – well, I should say two, single family residences with two builders that we have. That amounts to about $1.1 million. And then we also – as a result of some appraisals, we wrote down two land borrowing relationships, about another close to $1 million there. So – what was the rest of your question, Ross?

Ross Haberman – Haberman Value Fund

I was trying to get a sense of – as part of the charge-offs, when you've taken back land or spec one to four, what are you sort of getting as a percentage of your original loans? Are you getting $0.50 on the dollar on the land? You're getting $0.80 on the homes? I'm just trying to get a generalization like that, if you can.

Rich Jacobson

Tough to hit right on, Ross. This is Rich. But I think the one element is, remember that when we go into these spec construction loans, we're at 80% loan to value. So –

Ross Haberman – Haberman Value Fund

That's when you originally did it. But –

Rich Jacobson

But now that we're taking those hits, it's probably another 10% below that. So if you start from the beginning price, and you take –

Ross Haberman – Haberman Value Fund

So $0.30 on the dollar. So it's ending up being roughly a 30% cut from the original value?

Rich Jacobson

Correct. That's exactly where I was headed with that. And on the land, it will be a little deeper than that because we start there, 65% if it's raw land, 75% if it's development. So if you get down – I'm looking at those couple of land loans there if we're writing off in the 10% range, that's more like a 35% reduction in values on the land deals.

Ross Haberman – Haberman Value Fund

Got it. Are you seeing those reductions increasingly getting bigger? Let's just use the house in one – 30% from original price, 10% from your 80% loan to value. Are those numbers getting bigger to getting deeper? And with respect to over the winter when things are much slower?

Rich Jacobson

I think I know where you're headed with that, Ross. It's – the slope of that decline is probably much flatter than what you might have been alluding to there. So if things were 25% down a few months ago, they may be at 30 now, or –

Ross Haberman – Haberman Value Fund

Okay.

Rich Jacobson

– in the winter. But they aren't declining at such a rate that you'd expect those to be at 40 to 50. This is a slower time of year for us, you're right, here in the Northwest. But we aren't seeing a significant slope to that decline. It's been fairly consistent, unfortunately, in what we're seeing in this 25% to 30% decline.

Ross Haberman – Haberman Value Fund

And just one final question. When did you get reviewed by the regulators last?

Rich Jacobson

It was in September. They were here middle of September.

Ross Haberman – Haberman Value Fund

They were. Okay.

Rich Jacobson

Their three week visit, finished up right at the end of the month or I guess it was on the 2nd of October is when they left.

Ross Haberman – Haberman Value Fund

Okay. That was all of my questions. Thanks a lot.

Rich Jacobson

Thanks, Ross.

Operator

(Operator instructions) The next question is a follow-up from the line of Kristy Hotti. Please go ahead.

Kristin Hotti – Howe Barnes Hoefer & Arnett

Hello, hi, again. I was wondering – I like the detail in terms of the regionality in the NPAs. Could you provide us some detail in terms of sort of the price point of where the performing and nonperforming part of the residential portfolio is in terms of affordability or just what it would originally have been priced at?

Dennis Joines

They're kind of all over the board –

Kristin Hotti – Howe Barnes Hoefer & Arnett

Okay.

Dennis Joines

– to some degree. I guess if you look at the average price point would be in the mid-300s.

Kristin Hotti – Howe Barnes Hoefer & Arnett

So what about in terms of if you were to break it out and say, let's say, in the below 300, 300 to 500, and then 500 and above, do you have some sense of what percentage of the portfolio would be in those categories?

Steve Hoekstra

Hi, this is Steve. I believe most of our portfolio, especially as we move into Pierce County is in the lower entry-level –

Kristin Hotti – Howe Barnes Hoefer & Arnett

Okay.

Steve Hoekstra

– portfolio. In Snohomish County, it's probably in your middle bracket that you gave.

Kristin Hotti – Howe Barnes Hoefer & Arnett

In the like 300 to 500?

Steve Hoekstra

Yes, 300 to 500.

Kristin Hotti – Howe Barnes Hoefer & Arnett

And then do you have much in the over 500?

Steve Hoekstra

No, we have very few, and just one or two projects that I can think of that have any kind of stress. We've been hit I think pretty hard by the entry first time buyer. They were relying on the subprime mortgages and taking a while to absorb some of that inventory.

Kristin Hotti – Howe Barnes Hoefer & Arnett

And then just sort of in general, in terms of Snohomish County, whereabouts in Snohomish County would you say most of your NPAs are centered? Is it Bothell or Marysville or –

Steve Hoekstra

Pretty diversified. I'd say we have one concentration in Marysville –

Kristin Hotti – Howe Barnes Hoefer & Arnett

Okay.

Steve Hoekstra

– two in Lake Stevens. Got a couple projects in Mill Creek, which historically been a good market for us. I think that will come back first when the market improves.

Kristin Hotti – Howe Barnes Hoefer & Arnett

And what about the land?

Dennis Joines

We don't have a lot of concentrations. The land projects, we've got a couple of them down in Pierce County, and the rest of them mainly are in Snohomish County, Marysville, Lake Stevens (inaudible) and Mill Creek.

Kristin Hotti – Howe Barnes Hoefer & Arnett

Okay, great. Well, thanks for that.

Operator

(Operator instructions) We now show no further questions at this point. I would now like to turn it back for any closing remarks. Please go ahead.

Rich Jacobson

Thank you, Marissa. And thank you all for calling in and listening today. And thank you for your continued interest in Horizon Financial Corp. And please feel free to give us a call if you have any additional follow-up questions. Thank you. That's it, Marissa.

Operator

Ladies and gentlemen, this concludes the Horizon Financial conference call. If you'd like to listen to the replay of today's conference, please dial 303-590-6000, or 1-800-405-2236, entering access code 11120602. ACT would like to thank you for your participation. You may now disconnect.

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