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Sterling Financial Corp. (NASDAQ:STSA)

Q4 2008 Earnings Call

January 28, 2009 11:00 AM ET

Executives

Deborah L. Wardwell - Vice President of Investor Relations, Director

Harold B. Gilkey - Chairman and Chief Executive Officer

Daniel G. Byrne - Executive Vice President and Chief Financial Officer

Analysts

Brett Rabatin - Stern AG

Jeffrey Rulis - D. A. Davidson & Co.

Matthew Clark - Keefe, Bruyette & Woods

Operator

Good day, everyone and welcome to the Fourth Quarter and Fiscal Year 2008 Earnings Conference Call. Each of you will be on listen-only mode until the question-and-answer session following today's presentation. Today's conference is being recorded for replay. Additionally, the replay will be available at Sterling's website, www.sterlingfinancialcorporation-spokane.com, immediately following the call.

I would now like to turn the call over to Ms. Deborah Wardwell of Sterling Financial Corporation.

Deborah L. Wardwell

Thank you, Brad. Good morning. With us today I have Harold Gilkey, Chairman, President and Chief Executive Officer and Dan Byrne, Executive VP and Chief Financial Officer, who will be discussing Sterling Financial Corporation's fourth quarter and full year 2008 earnings results.

Before I turn the call over to Harold, I must remind you that during today's call, Sterling's management will be referencing forward-looking statements that are not historical facts and pertain to our future operating results. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations, and intensions and other statements contained in this report that are not historical facts.

These forward-looking statements are inherently subject to significant business, economic and competitive uncertainties, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

Sterling's actual results may differ materially from the results discussed in these forward-looking statements because of numerous possible risks factors and uncertainties. These risks include, but are not limited to, the possibility of adverse economic developments which may, among other things, increase delinquency rates and risks in Sterling's loan portfolios, shifts in industries which may result in lower interest rate margin, shifts in demand for Sterling's loan and other products, increased cost or lower than expected revenues or cost savings in connection with acquisitions, changes in accounting policies, changes in the monetary and fiscal policies of the Federal Government and changes in laws, regulations and the competitive environment.

In closing, I'd like to mention that Sterling Financial Corporation's Executive Team will be at Stern A.G.'s Fourth Annual Financial Service Conference, February 9 through to 10th in Orlando, Florida and at the Sandler O'Neill West Coast Financial Services Conference in San Francisco, March 2nd through to 3rd.

With that said, I'd like to turn the call to over Mr. Harold Gilkey.

Harold B. Gilkey

Thank you, Deborah. Good morning, everyone. Welcome to our conference call. Sterling Financial Corporation reported its first full year loss since commencing operations. For the year, Sterling reported a net loss of $336.7 million or $6.51 per share.

To help put this in perspective, I'd like to spend a moment putting this loss into the context of our earnings generation capacity and our capital position.

Looking at the fourth quarter 2008 results, Sterling's pre-tax loss was $436.2 million. The following pre-tax items influenced our results; a non-cash charge of 223 million for the impairment of goodwill, a provision for credit losses of 228.5 million and a write-down of REO of $17.5 million, and of course a reversal of approved interest income on non-performing loans of $10.4 million.

When you add back the non-cash charge and these credit related expenses, you will see that the underlying earnings generation capacity of Sterling's core banking operation remains solid. Sterling continues to generate quarterly pre-tax, pre-provision income of nearly $45 million.

During the quarter, Sterling proactively took initiatives to enhance its capital position, to create a safety and soundness buffer to absorb credit losses. As a result, Sterling ended the year with one of the strongest cash positions in its history.

In early December, through the sale of preferred shares and related warrants to the U.S. Treasury Department, we raised $303 million in capital. Our total risk-based capital was 13% at year end.

In conclusion, Sterling's core banking operations remains healthy. Its capital position is strong and this liquidity sources remain in excess of $3 billion.

I now want to spend a moment highlighting the provision for credit losses. The elevation in the provision reflects three factors; higher levels of classified assets, significant decline in the price values of real state and a modification in our methodology in determining the fair value on loans identified as impaired.

With respect to the credit cycle, Sterling continues to experience stress in its residential construction portfolio and has now seen some weakness in the commercial construction portfolio. This is primarily due to slow lease process.

The continued stress in the residential construction mainly emanates from our Portland market area where real state values have declined. In commercial construction, we are experiencing some stress primarily in Northern California market. A credit deterioration in our residential mortgage and C&I portfolios appears to be solely construction related.

During the quarter, we modified our methodology in determining the fair market value of impaired real state loans and this directly affected our level of non-performing loans.

Dan will discuss this modification in greater detail later in the conference call.

Now let's focus on change. In a difficult credit cycle, Sterling team remains focused. Sterling's balance sheet continues to be strong. Total capital was $1.14 billion. Sterling's ratio of tangible equity to tangible assets improved to 7.07% from 6.01% at the end of 2007.

Our additional liquidity ... in addition, our liquidity capacity is over $3.2 billion and improved relative to the third quarter of '08.

Operationally, we made progress. Total deposits grew 9% to a record $8.315 billion. Importantly, non-interest bearing accounts, that are typically held by our commercial customers increased 3% year-over-year.

For the year, the net interest income was up 1% to $359.6 million. This was despite the drop of the net interest income. Sterling is asset sensitive and has absorbed the decline of over 400 basis points in the Fed Funds rate since September of '07.

Sterling also has to offset the reversal of $28.6 million in accrued interest income.

For the year, fees and service charges income rose 7% to nearly $60 million.

Golf Savings Bank, our residential mortgage origination unit, reported encouraging result. Gain on sale of loans was up to over 20% for both the fourth quarter and the full year.

During the fourth quarter of 2008, Golf experienced in excess of 30% increase in new loan applications. Even with the expectation of lower hold-through percentages on refinance applications, we anticipate that Golf posed (ph) origination volumes in 2009 should get off to a very encouraging start.

I would like to thank the entire Sterling team for its execution in this difficult time. Throughout the year Sterling bankers have been working in partnership with our borrowers to help avoid credit defaults and to protect the bank from losses. Because of our efforts and early intervention and remediation, we believe the level of classified assets continues to be manageable and will eventually lead to beneficial results.

As I've said before, the resolution process is likely to take several quarters.

I especially want to thank Nancy McDaniel and Steve Cage for all other and for all their direct reports, for their leadership and commitment in managing our credit administration efforts. All are putting in very long hours to see our way through this credit cycle. I also would like to personally congratulate Heidi Stanley, who was elevated at the beginning of this year to the role of Chairman of Sterling's Savings Bank's Board of Directors.

Additionally, congratulations go to Greg Seibly, who was appointed President of Sterling's Savings Bank and Ezra Eckhardt, who will assume the position of Chief Operating Officer.

These promotions reflect the strength of Sterling's management team and the success of our ongoing strategic plan for management succession and development.

At this time I would like to turn the call over to Dan, our Chief Financial Officer.

Daniel G. Byrne

Thanks, Harold. To supplement the information provided in the press release, I am going to focus on a few key highlights for the quarter and then provide you the opportunity to ask specific questions during the Q&A portion.

Yesterday we announced core earnings or the loss of $132.5 million or $2.56 per share for the quarter. Core earnings exclude; goodwill impairment charges, mergers and acquisition and other non-recurring costs all that and related income taxes. Harold has already mentioned that during the quarter we recognized a credit provision of $228.5 million for non-performing loans and a $17.5 million write-down on REO.

I will talk more about the provision in just a minute.

The other large adjustment was the goodwill impairment charge of $223.8 million. You will note that the final amount came in lower than our preannouncement. There was really no difference in our approach at the preannouncement day however we were still in the process of finalizing our analysis.

The press release details the reasons for the impairment under the cash and goodwill analysis, and I would like to point out that we evaluated our investment portfolio as part of our total analysis and had no other than temporary impairment charges for any of our investments including private label, mortgage backed securities, municipal securities or better home-loan-based stock.

At the end of the fourth quarter, Sterling's total assets were $12.8 billion, up from the levels at September 30, 2008. But there were a few dramatic swings in the composition.

First; Sterling issued preferred stock and warrants to the U.S. Treasury on December the 5th. We recorded a value of nearly $292 million for the preferred stock and a balance of approximately $11 million as the value of warrants that's included in additional paid-in capital.

The annual dividend of 5% is payable to the U.S. Treasury, quarterly, on the 15th of February, May, August, and November. Sterling then down streamed $223 million to its subsidiary banks and retained $70 million of the proceeds at the holding company level.

This cap will substantially enhance the regulatory capital position at Sterling and its subsidiary banks. As a result of this capital infusion, both subsidiary banks increased their investments in government-backed mortgage bank securities.

The yields initially were in the range 5.6 to 6 %.

Finally, the loan portfolio reflected a decline in balances of nearly $270 million from the third quarter of 2008. A year ago, Sterling made a strategic decision to lower its mix of assets related to construction. Of the $270 million reduction in loan balances, 232 relates to the reduced balances in our construction portfolio.

Now let me talk about asset quality for a moment. The provision... I'll also address the provision for credit losses as well as allowances for credit and trends in our asset quality.

There were several factors that led us to set aside a larger provision compared to what we expected earlier in the fourth quarter. First and foremost, that provision relates to a decline in the appraisal values of real estate.

As we began the fourth quarter, we began to see adverse trends in real estate values at our primary markets. As we got deeper into the quarter and particularly into December, we saw appraisal valuations fall significantly in many of our markets.

These valuations affected not only the specific assets but also resulted in adjustments to our loan loss provision rates that we use to evaluate the rest of the portfolio.

As part of our classification system, we have increased our loss allowance rates to reflect lower current real estate values in our markets. As an example, the loss provision in the sub-standard portion of our loan portfolio increased to 21% at the end of the year compared to a little under 15% at the end of the third quarter.

The second factor was an increase in non-performing and classified assets. At December 31, 2008, gross non-performing assets, that is nonperforming assets before specific reserves, were $610.7 million up from $437 million at the end of the last quarter, representing an increase of nearly 40%. Classified assets, which is really the driver of our provisioning, increased from $672 million at the end of the third quarter to 985 million at the end of the fourth quarter, representing a 47% increase.

And then the third factor is that we did modify our approach in determining the fair values and certain impaired loans, to exclude the value of borrower's personal guarantees.

In summary, these were the factors that required the higher provisioning. And nearly 80% of our non-performing assets are related to construction.

Residential construction was 67% of non-performing assets and commercial real estate construction added an additional 12% to our non-performing assets.

Non-performing assets increased approximately $174 million from the levels reported at the end of the third quarter. And of this, 84% was related to construction; approximately 94 million in residential construction and 53 million in commercial real state construction.

The remaining 20% of non-performing assets were spread across several loan types. C&I made up 10% of the non-performing assets. And these non-performing assets partly were related to construction co-related industries.

Non-owner occupied residential was less than 7% and the balance of non-performing assets from permanent commercial real state, consumer and multi-family construction, each made up about 1% of non-performing assets.

The markets where we experienced the largest increase in overall non-performings, was in Northern California with $52.8 million, primarily related to commercial real estate construction with approximately seven projects ranging in size from 3.9 million to $14.8 million.

Other markets experiencing increases in overall non-performing assets include; the Puget Sound with $42 million, two-thirds of which is related to two projects South of Seattle near Tacoma.

Southern California with $41.6 million primarily related to four projects ranging in size from 6.3 million to 13.5 million, Idaho, outside of Boise with $28.9 million with one project in Hailey, Idaho for 12.2 million and nearly two dozen smaller residential construction projects in Central and Northern Idaho.

Portland, Oregon, where we saw an increase of approximately $27.9 million, primarily related to 18 residential construction projects, the largest of which was $8.8 million. The loss given default has increased in virtually every market. And to give you a sense of our loss recognition, looking at the top-twenty non-performing assets, which represent over $250 million or approximately 41% of all non-performing assets, the aggregate loss given default is a little over 28% of the original book balance.

Some markets have higher loss given default; such as the other Idaho component and Southern California which are in the 30 to 40% loss content range.

Regarding the Puget Sound which is our largest market with approximately 845 million in residential construction commitments, this market continues to hold up a bit better than most of our other markets, especially in the core area around Seattle.

On the fringe areas, the Puget Sound region is showing a little more weakness with gross non-performing loans increasing to $74 million from $38 million at end of the third quarter and at December, represents 8.7% of the outstanding commitments to this region.

As I mentioned earlier, two projects South of Seattle, near Tacoma were responsible for most of this increase. Fortunately most of our residential construction in the Puget Sound region is weighted toward vertical construction and not land.

Now that being said, we are a bit guarded over the future prospects given some of the recent announcements from large employers in the region.

The classified assets have a similar profile to the non-performing assets. The increase in total classified assets was more notable in the construction portfolio with residential construction representing approximately 63% of classified assets and the commercial real estate construction representing another 12% of classified assets or combined 75% of total classified assets at year end.

You will note that in the quarter our construction portfolio was reduced by approximately $232 million. This reduction was accomplished through roughly 239 million in net maturities and pay-offs, a 190 million in new loans funded, as well as partial or total resolution of a number of non-performing construction loans totaling a $183 million.

And I would add, just add that during the quarter our REO balance increased to $62.3 million and represents approximately 115 properties or projects.

The losses on these real-estate assets have increased significantly, but the level of loss given default is very dependent on location and stage of completion. Generally, the loss given default is roughly 50% in the aggregate with vertical construction losses averaging around 15% and we do have a few land related losses up to 80%.

Our commercial real-estate and multi-family construction portfolio is approximately $1.4 billion based on total commitments. About 25% is in office space, 20% is in multi-family and retails strip centers add 16%, while retail standalone projects are about 7% of the total portfolio.

Approximately 20% of this portfolio is in the Puget Sound, with 15% in Northern California, and 12% in Southern California and the balance is geographically spread throughout our footprint with less than 10% in other markets.

Let me address some operating results. Net interest income and net interest margin for the quarter are lower than both the third quarter of 2008 and the fourth quarter of last year. The decrease is reflecting additional compression from a higher level of non-performing assets, the drop in prevailing interest rates following the Federal Funds cut and the Fed Funds rate and in lower balances.

We anticipated some of this reduction in net interest income and partially offset that with the purchase of mortgage-backed securities. We will also get in some additional benefit from the capital received from the U.S. Treasury as these funds were invested in mortgage-backed securities in early to mid-December.

We continue to emphasize making loans to businesses and to consumers. In the press release, we highlighted the residential loan originations by our subsidiary bank, Golf Savings Bank, and I would add that total originations for all types of loans was nearly $720 million. Both Sterling Savings Bank and Golf are committed to making every qualified loan that we can. The decrease on a linked quarter basis is more reflective of a softening demand for loans.

I would like to highlight that nearly 3.5% quarterly rise in our deposit base to a record $8.35 billion. On a linked quarter basis, we did experienced a little more growth in savings and time deposits than in the transaction accounts. But in a very challenging environment, I think this is a very good performance. We did manage to reduce our cost-to-deposits by about 10 basis points on a linked quarter basis despite intense rate competition. And on a year-over-year basis, deposit costs are down 95 basis points.

We continue to control our operating expenses. Excluding the goodwill impairment charge, operating expenses were down on a linked quarter basis and compared to the fourth quarter of a year ago.

Our core efficiency ratio improved again during the quarter as measured by the ratio, as non-interest expense to average assets, which dropped to 2.17% in the fourth quarter of 2008, down from 2.24% on a linked-quarter and 2.52% in the same period a year ago. We continue to pursue operating process improvements and to drive operating expense reductions.

With respect to income taxes, we recognized a tax benefit of $81.1 million which equates to an effective tax rate of approximately 19%. We expect to file for a refund for the current and prior year's taxes as quickly as we can.

We will not be providing specific earnings guidance for 2009, only because there are numerous headwinds and uncertainties that make it very difficult to project. I would like to state that we do not anticipate a repeat the fourth quarter. Nonetheless we are cognizant and realistic about the challenges our industry continues to face in 2009. The national and regional economies will be a significant factor in our success in 2009. It will affect the demand for bank products, including loans. Deposit flows are likely to fluctuate depending on prevailing interest rates and customer perceptions regarding FDIC insurance.

Deposit flows in turn will influence our cost of funding and net interest margin. We may get some near-term benefit from the cost of our borrowings as we have approximately $200 million of maturing Federal Home Loan Bank advances in the next six months and expect it could reduce by 100 to 200 basis points. And we have trust preferred securities that should be priced downward from their current aggregate cost of around 4.5%.

We will continue to emphasize making business in consumer loans and taking deposits with the goal of improving our core deposit relationships, where we resolute in reducing non-performing assets as quickly as we can.

We will be aggressively pursuing personal guarantees and our success could lead to the recognition of loan loss recoveries into the future. While we prefer to increase loans and deposits in 2009, the marketplace is poised to being more like flat at best. We expect to return to profitable operations in 2009 either with the expectation for a continued elevation in our loan loss provisions.

We will continue to control our operating expenses. However, there is one lined item that is anticipated to increase, the FDIC insurance premiums. This increase in premiums reflects the rise in the level of basic insurance deposit coverage to $250,000 and Sterling's participation in the transaction and debt guarantee programs.

We anticipate the expense for FDIC premiums to be double to triple of what it was in 2008. Reflecting the effects of tax credits, we do expect Sterling's effective annualized tax rate to be 18 to 20% in 2009.

And finally, we expect to remain well capitalized through 2009. We believe we can manage through the credit cycle and our year end capital position and our earnings generation capacity provide a cushion to absorb additional credit costs of between 400 and $500 million depending on the timing of the losses in earnings without the implementation of draconian measures.

With that, Harold, let me turn it back to you.

Thank you, Dan. What I assess Sterling's fourth quarter and full year performance during this very difficult climate, I am more confident in the skills and resolution of Sterling's next generation of management team to come through this credit cycle.

This group demonstrated repeatedly its ability to come together and act as one body in addressing change. What 40 years of banking industry has taught me is that the caliber and collective effort of the management team matters more than ever in a tight...in a tough credit cycle.

Our capital reserve and liquidity positions are at the strongest levels in Sterling's recent history. As we begin 2009, we believe our outlook is realistic. 2009 is likely to be contain continued headwinds, rolling unemployment, slowing economy and an uncertain real estate market.

We recognize that the Pacific Northwest has been insulated but certainly not isolated from the national economy. Still we believe our capital position is adequate to enable Sterling to see its way through this cycle. We do not anticipate the need for further capital. Importantly, the capital we raise through the U.S. Treasury program will allow Sterling to support credit demands and economic development in the communities which we serve.

As a community bank, service to local communities is the heart of our corporate culture and the backbone of our competitive advantage. Sterling will continue to exercise prudent and conservative credit standards. Sterling will balance its produciary stewardship of public financing with the need for increasing credit availability to the communities we serve.

Specifically, Sterling will support business lending to small and medium-sized businesses and of course consumer borrowings. Additionally, we will sustain higher levels of residential mortgage financing for conforming low interest mortgages the first time and low to moderate income buyers.

Whenever possible, we will help owner are supplied (ph), mortgage holders who are delinquent in their payments to avoid foreclosure.

In closing, the Sterling team remained tenaciously focused on doing what it can control. We continue to shift our asset mix towards high quality lending relationships in the business and consumer groups. We continue to grow our treasury management and other business related services, thereby increasing fee and service charge income. We continue to control overhead expense through systematic process improvement. We continue to manage and workout and resolve credit issues.

Let me end with the reminder of the strength of the Sterling franchise. Our capital and liquidity positions remain solid. The operations of the core banking business are solid and performing well. Our deposit franchise is strong and continues to expand through high quality, relationship-based commercial deposits.

We believe that we have a strong management team that has the experience to address the current market disruption and the asset quality challenges. Our credit team is capable and seasoned and has significant experience and loan resolution to work up. We are continuing to build our corporate and commercial banking franchise in Sterling and our residential home loan business at Golf Savings Bank.

With that, I'd like to turn the call back to Brad and begin the question-and-answer session. Brad?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question is from Brett Rabatin of Stern AG.

Harold Gilkey

Good morning, Brett.

Brett Rabatin - Stern AG

Good morning, Harold. How are you?

Harold Gilkey

Good.

Brett Rabatin - Stern AG

First, thanks for providing additional color on the commercial real state portfolio. That was helpful. I am curious maybe, if Dan, if you have the numbers for the commitments for construction and commercial real state land, I know construction commitments were about 0.5 billion last quarter, and CRO (ph) and land were about 1 billion, Dan if you have those numbers handy?

Daniel Byrne

In the commercial real estate portfolio?

Brett Rabatin - Stern AG

Yeah, I just wanted... I guess I'm trying to figure out, I am thinking not so on a risk based capital and the commitments of balance sheet, what they are and obviously half of that is sort of goes into the total risk-based calculation?

Daniel Byrne

The commercial real estate component is about $950 million.

Brett Rabatin - Stern AG

Okay.

Daniel Byrne

Multi-family is the $470 million.

Brett Rabatin - Stern AG

Multi-family is 470 million?

Daniel Byrne

That's correct.

Brett Rabatin - Stern AG

Okay. Do you have a number for construction? Or is that included in the commercial real estate?

Daniel Byrne

In terms of the residential construction?

Brett Rabatin - Stern AG

Correct.

Daniel Byrne

Residential construction is about $1.9 billion.

Brett Rabatin - Stern AG

1.9... okay. Maybe we can follow-up offline on that...my numbers are a little different. I think I am wanting (ph) something together. And then, I wanted to ask... you guys were talking about how, it seems like you're still are confident about, you obviously had a tough quarter in the 4Q and recognized a lot of losses but it sounds like you're still fairly confident about how things will play out despite a tough environment.

But you really haven't had, in terms of credit I mean, it's all been related to basically the construction and real state market. And so, I guess I'm curious as to how you're thinking about the commercial real state portfolios, the C&I portfolios and just stress to us your doing in those areas and why you are confident even though you know the economy is sullying those portfolios or cause some additional stress?

Harold Gilkey

Brett, let me begin by saying that my confidence level for the future is deteriorated and I believe that that's positive for the marketplace. If you'll recall in end of the first quarter of '08, we were reporting substantial losses, substantial classified non-performers. The second quarter, we saw that there was a down turn and the upturn of FDAs and classified and I felt fairly comfortable that the process was going to work well.

Third quarter was additional surprises, we grew rapidly. And the fourth quarter, the impact of the re-appraisals and some additional problems in the residential construction area as well as, and I don't mean to focus too much on this but the way we change our accounting structure on impaired loans, leaving out the guarantors' value to the process.

We think that will give us some recoveries at a later date but today it's just there.

I do have very good comfort zone with the rest of our portfolio other than the construction portfolio. And I think I am seeing a slowdown in the additional process of residential construction and may be the identification of commercial construction slowdown.

I've visited nine projects personally and the buildings are quality, at the right locations. There is just a general slowdown in lease up and that will impact the valuation on re-appraisals as the NOIs are coming back to what I would call, appropriate levels.

Brett Rabatin - Stern AG

And Harold how much of the commercial construction portfolio is... how much of that is pre-leased buildings versus non? Or you don't have it?

Harold Gilkey

I... we have that right in front of us Brett.

Brett Rabatin - Stern AG

Okay.

Daniel Byrne

We'll have to get back to you on that one.

Brett Rabatin - Stern AG

Okay. And then Harold I wanted to circle back around about around the Puget Sound. I want to make sure I understood. It sounds like you are basically saying that market's still better. But I wasn't clear how much of that was a function of, you have more vertical rather than land exposure to that area or you actually see the economy there still being more resilient?

Harold Gilkey

It's a combination of all of that. The Puget Sound market still remains one of the best performing economies, albeit there is a little flutter in it. You've probably noticed a reduction in employment announced at various major employers.

But the growth in jobs over the last three years and quite frankly even with the reduction of the staff, we think the employment will stay relatively strong in that market. And I think... the other piece of that is we don't have much land. It's all... the bulk of it is vertical. So, I think that that market will remain relatively strong in our particular product.

Brett Rabatin - Stern AG

Okay. And then just last, I want to make sure I understood something, on the guidance that you gave Dan, you said profitability in '09, does that mean for the year or for a particular quarter? I didn't quite get the gist of what you meant by that statement.

Harold Gilkey

We were referring to the full year 2009 with the statement.

Brett Rabatin - Stern AG

Okay. Great, thanks for all the color. I'm looking forward to seeing you guys in a few weeks.

Harold Gilkey

Thank you.

Operator

Our next question is from Jeff Rulis of D.A. Davidson.

Jeffrey Rulis - D. A. Davidson & Co.

Good morning.

Harold Gilkey

Good morning, Jeff.

Daniel Byrne

Good morning.

Jeffrey Rulis - D. A. Davidson & Co.

So, is it safe to say you're the largest land construction exposures in Portland, meaning the non-vertical construction?

Daniel Byrne

Certainly we have more acquisition development in the Portland marketplace compared to the Puget Sound. I don't know if I have that range in terms of the highest by market Jeff, but it's certainly is higher than Puget Sound.

Jeffrey Rulis - D. A. Davidson & Co.

Okay. Do you have just a percent breakout of the entire residential construction portfolio in terms of land or A&D versus vertical, that type of breakout?

Daniel Byrne

Based on total commitments, Jeff, the vertical looks like it's about 52% overall. The raw land is still 12% of total with the A&D and large making up the balance.

Jeffrey Rulis - D. A. Davidson & Co.

Okay. That helps. All right, thanks. And then on the... thanks for the FDIC insurance premium you mentioned on the guidance. But what was that level of FDIC insurance premiums paid in 2008?

Daniel Byrne

The insurance premiums in 2008 were approximately 6.3 million and we had about 2.7 in 2007.

Jeffrey Rulis - D. A. Davidson & Co.

Okay. And then and Dan did you... any guidance on the provision level for '09 or is that... not releasing that at this point?

Daniel Byrne

It's pretty hard to give that. We are not going to provide a guidance on that at this point.

Jeffrey Rulis - D. A. Davidson & Co.

And then lastly, Dan did you mentioned -- you mentioned something at the very beginning about was FHLB stock and mortgage-backed security write-downs included in any write-down this quarter?

Daniel Byrne

We did not take any impairment or other than temporary impairment charge-downs or write-offs in any of the investment portfolio.

Jeffrey Rulis - D. A. Davidson & Co.

Okay. Thank you. That's it.

Daniel Byrne

Thanks Jeff.

Operator

(Operator Instructions) Our next question is from Matthew Clark of KBW.

Matthew Clark - Keefe, Bruyette & Woods

Good morning, guys.

Harold Gilkey

Hey Matt.

Daniel Byrne

Hey Matt.

Matthew Clark - Keefe, Bruyette & Woods

Can you maybe update us on how you guys think about tangible equity or tangible common equity, given that it doesn't include to the tie-up preferred proceeds and TCE really remains the first-off position so that any losses that flow through or any help from the tie-up really doesn't incur... doesn't occur until after TCE essentially goes away.

So, I just want to get your sense for how you... your ability to manage that whether or not you've gotten any... if there's been any kind of leniency among regulators to allow that to drift lower if necessary and buy you some time, since the tie-up is essentially I think buys you time?

Harold Gilkey

You know Matt, in all my conversations, there has been yourself and one other analyst that mentioned, common tangible equity to be in, I think it's a (inaudible).

Matthew Clark - Keefe, Bruyette & Woods

Okay.

Daniel Byrne

I would just add that I think the regulatory capital levels are still the primary focus of the regulators. And as we mentioned, we got very strong regulatory capital positions. To me I think, the tangible common per share is more meaningful. And at the end of the December, that was 11.41 and at some point we are going to be trading based on tangible common equity.

Matthew Clark - Keefe, Bruyette & Woods

Okay, great. And then, can you give us a sense for the commercial construction piece, I guess the 1.4 billion in commitments that you have, and that's was helpful with the office, multi-family reach out ship and so forth. But I guess in terms of the incremental non accruals, you saw this quarter increasing and also related classified assets, the types of, I know you mentioned that they related to lease ups. But the types of properties we are talking about here, I guess more specifically in terms of the issues you saw this quarter?

Daniel Byrne

Like you said, I think most of that was in the Northern California component. And the wagon person (ph) break, I don't know they have this breakout with me that on me.

Matthew Clark - Keefe, Bruyette & Woods

Okay.

Daniel Byrne

There's a couple of projects.

Harold Gilkey

Matt, on my visitation to some of these projects, it looked like it was both office rent up and retail rent ups.

Matthew Clark - Keefe, Bruyette & Woods

Okay, that's helpful. And then, in terms of your ready construction commitments, I guess two questions as it relates to those exposures. So I guess one; would you be able to update us on the mix of that 1.9 billion in related commitments by market? And consistent with the markets, you've provided in the release and what you've done in the past, if possible?

Daniel Byrne

The Puget Sound is still our largest component at roughly 41%. Caroline's (ph) just under 19% and then Southern California represents about 7 to 8% of the portfolio. While this is just under 5% and Northern California, it is 4% and Bend is 3.1%.

Matthew Clark - Keefe, Bruyette & Woods

Okay. And then if I may, on 1.9 billion ready construction commitments, you provided property type disclosure in the past to take more recently. In terms of to speculate A&D town home, collateral, pool, condo, lot, rolled lamp, pre-sold customer and multi-family. So we have I guess, some commitments in terms of those property types structures. Because you mentioned that your underweight land, I just want to get a better sense for... not only those for only, where those commitments stand today but in terms of if you're able to breakdown the non-performers by property type as well, might be helpful? I don't know if that's something you have available right now but.

Operator

(Operator Instructions).

Daniel Byrne

Jeff, I think on the non-performers in the residential construction based on the balances would be about 40% in the vertical range and you've got raw land that's about 4% of the non-performers and then the balance in parts A, D.

Matthew Clark - Keefe, Bruyette & Woods

Okay. Thank you.

Operator

At this time we have no further question.

Harold Gilkey

Thank you, Brad. Well everyone, I'd like to thank you very much for you participation in this conference call. We look forward to talking to you again after our first quarter 2009. The earnings release is currently scheduled for Thursday April 23rd, followed by earnings call the next morning at 8:00 AM Pacific Standard Time.

I would like to point out that our Sterling's annual shareholder meeting will take place on Tuesday, April 28th. I would like to thank you again for your participation in this call.

Daniel Byrne

Thank you.

Operator

This concludes today's call.

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Source: Sterling Financial Q4 2008 Earnings Call Transcript
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