Glacier Bancorp Q4 2008 Earnings Call Transcript

Jan.30.09 | About: Glacier Bancorp, (GBCI)

Glacier Bancorp, Inc. (NASDAQ:GBCI)

Q4 2008 Earnings Call

January 30, 2009 11:00 AM ET

Executives

Michael J. Blodnick - President and Chief Executive Officer

Barry Johnston - Chief Credit Administrator

Analysts

Joe Gladue - B. Riley & Co. LLC

Ben B. Crabtree - Stifel Nicolaus & Company's

Chris Stuplin - D.A. Davidson & Co.

Matthew T. Clark - Keefe Bruyette & Woods Inc.

Brett Rabatin - FTN Midwest Securities Corp

Operator

Good day. Are participants are now on line in a listen-only mode. It's now my pleasure to hand over the conference to the moderator, Mick Blodnick (ph). Please go ahead, sir.

Michael J. Blodnick

Thank you and welcome of you and thanks for joining us this morning. With me this morning is Ron Copher, our Chief Financial Officer, Don Chery our Chief administrative Officer, and Barry Johnston our Chief Credit Administrator.

Last night, we reported earnings for the fourth quarter and the full year of 2008. Earnings for the quarter were $17.014 million. This compares to $18.146 million in last years quarter, which is a decrease of $1.132 million or 6%.

On a diluted earnings per share basis for the quarter we produced $0.29. This compares to $0.34 in the prior year's quarter, once again a decrease of 15% as the share count increased during the quarter, primarily due to the capital raise. And of course also the 640,000 shares that we issued in the Bank of San Juans transaction. And we've really not had much time yet to deploy or leverage the capital in the higher yielding assets at this time.

Earnings for the year were 65.657 million versus 68.603 million for 2007, once again a decrease of 2.946 million or 4% for the year. Diluted earnings per share for the year were $1 19. That's down from a $ 28 last year or a decrease of 7%.

Our return on average assets for the quarter was still a respectable 1.27%, a return on average equity of 11.02%, which considering the level of capital we have in the company was not too bad.

For the year, our return on average asset was 1.31% and our return on average equity was 11.63%, which both include the $4.6 million after tax OTTI charge we took on the Freddie Mac preferred and the Fannie Mae common stock in the third quarter.

We really felt our profitability ratios held up well during the year 2008. The quarterly earnings numbers were straightforward, absent any non-recurring income or expense items. It's always preferable for us to report core operating earnings and net earnings that are kind of one and the same and don't have a lot of noise attached to them. And that's the way the fourth quarter was for us. It was just not a lot of noise in the numbers.

Although our earnings for the quarter and year were not what we had hoped for, there was some underlying strength in our performance. Our pre-tax, pre-provision earnings for the fourth quarter increased 26% over the same quarter last year. And for the full year 2008 were up 16%. So we felt that there was good core earnings momentum generated throughout the year and especially in the last quarter.

Total assets for the year grew 15%, which exceeded our expectations. Part of the reason for the higher asset growth was the additional investments purchased during the year and of course the acquisition of Bank of the San Juans.

However excluding the acquisition, organic loan growth last year was also a very strong 10% increase. Deposit growth on the other hand was flat, as we refused to compete with the irrational pricing we were witnessing in many of our markets. We're hopeful that some of that sanity returns to deposit pricing this coming year and we're beginning to see that some deposit or some depositors are searching out a safe haven rather than always looking for highest rate.

Now one positive trend that we experienced last year was the number and this has always been a main focus of the company and all of our banks and that is growing check-in accounts. And although the dollar of check-in accounts in DDA's and NOW accounts have been under a lot of stress and strain over the last two years, we've consistently been able to add more and more net accounts each year.

And this past year in 2008 once again our total number of new business and personal check-in accounts increased by 9%. So if nothing else, if even if there is still more pressure put on the dollar amounts in these accounts it is an opportunity for us to... with these additional relationships to establish more fee income and hopefully other products and services can be sold.

During the quarter, we did close the transaction with Bank of the San Juans located in Durango, Colorado. This marked the initial entry into the State of Colorado and we're thrilled to have added such a quality institution with a very talented group of bankers to our family of banks. We expect some very positive things in the future from our Bank of the San Juans.

Another highlight of the quarter was the successful common equity raise we completed in November. We felt very fortunate in this very difficult environment to have such a positive investor response to our equity offering.

With 94 million in net proceeds, in addition to what was already very strong capital levels, GBCI is now in good position to take advantage of future opportunities as they present themselves. Every capital ratio improved during the quarter and year, tangible common equity end of the quarter at 9.59%, versus 8.03 in last year's fourth quarter. Tangible common equity increased by $143 million or 38% during 2008.

We continue to believe that top tangible common equity is the highest form of capital and the current amount of tangible common equity should serve us well during these difficult times.

In addition, all regulatory capital levels are also at or near all time highs. At year end our Tier 1 ratio stood at 14.2% and our risk based capital ratio was 15.46%. And that also includes adding Durango which somewhat brought that ratio down. Prior to Durango it was well above 16%. So in this current operating environment maintaining equity and capital ratios at a high level, we believe is the right thing to do.

Asset quality continues to be the number one challenge facing banks today. And in that respect we're no exception. NPAs increased in the fourth quarter by $13.7 million to 84.5 million or 1.46% of assets. This compares to 1.30% the prior quarter and 0.27 a year ago. So you can see where that ratio has gone in the last 12 months.

Net charge-offs; we ended the year at 21 basis points. Although the last two quarters were running at about a 40 basis point annualized rate. Even though we didn't achieve our long-term goal last year of keeping NCOs at or under 50 basis points, we still felt that it was a very respectable performance from a net charge-off perspective.

Our ALLL ended the year at 1.86% versus 1.67% last quarter, and 1.51% at the end of 2007. We provisioned $12.2 million to the ALLL in the fourth quarter and that compared to $3 million in the same quarter last year. In addition we felt good that we covered our net charge-offs for the quarter 3.3 times.

For the year, we added 28.5 million to the reserve and that amount also covered the net charge-offs of 8.8 million by over three times. Our coverage ratio was about unchanged for from the prior quarter, but well below last year's coverage ratio, where this year we ended the quarter at right around 91-92% and the ratio last year was a little over 400%. We did see our 30 to 89 day delinquencies increase from the prior quarter and ended the year at 54.8 million, an increase of 29 million for the quarter and 9.3 million from last year's fourth quarter. Clearly there are still credit issues that will continue to need our full attention in order to keep the delinquencies and the non-performing assets at manageable levels.

We expect credit quality to continue to be a challenge and are not expecting any turnaround in the near term and maybe not at all this coming year. So all of our banks are going to have to continue to be diligent in working through these credits, maintaining adequate reserves for their problem loans.

One area that was a bright spot for us all year has been the net interest margin. Sequentially our net interest margin increased 16 basis points in the fourth quarter to 4.81% and is up 29 basis points from 452 in last year's quarter. Loans added to non-accrual status during this last quarter cost us three basis points in net interest margin.

Our expectations going into the year was for a lower margin of around 425 to 430. Instead our net interest margin averaged 470 during 2008. Now I don't expect much further expansion in the margin as I think our funding cost can't go much lower, but hopefully we can maintain at or around this current level for the next couple of quarters at least. And hopefully not suffer any significantly contraction in the margin.

I felt that banks did a great job throughout the year of managing and expanding their margins. They protected the yields on their earning assets and were proactive in adjusting lower rate or adjusting two of lower interest rates on the funding side.

During the quarter, our net interest income was up a very healthy 8.5% as interest income increased only 1%. And yet in this environment just that 1% increase, I thought was an omens job (ph) and interest expense decreased by 16%.

During the year, we saw even more dramatic differences as interest income was down only 0.6% while interest expense was down 25.5%. Although again we would not expect to see this much further reduction in interest expense as we remove into 2009, we're also not looking for any increase any time soon.

Another real bright spot was our efficiency ratio. The efficiency ratio decreased to 49% from 53% the prior quarter, and that 49% was a fourth quarter number. And for the year our efficiency ratio came in at 52% compared to 56% last year. This is not (ph) a very positive trend during the quarter and the year as the company did a good job of controlling costs. Although increased revenues, especially net interest income played a big part in improving efficiency, I though the 11 banks did a stellar job of controlling their expenses.

Non-interest income was $600,000 or 3.7% lower in the fourth quarter compared to the previous year's quarter. However, excluding all the non-recurring gains and charges, non-interest income increased $3.5 million during the year.

I think that is another very positive trend is even though the industry struggled from production and a fee income perspective our fee income actually, excluding all the items, we felt very good that we were able to actually show that type of an increase during 2008.

I guess in closing by now you've all heard hundreds of times how bad the economy and the struggles our industry is going through. And there is no argument that these are tough times. So far however we've navigated through this turbulence about as well as we could ever hope for. Although we did not achieve the level of performance we planned we cannot but be happy with the strides that we did make this past year.

I've said it countless times, we have 1,700 smart hard working bankers and Directors that give their all for the continued success of GBCI. And we're very proud of what they have accomplished. We don't expect it to get any easier anytime soon, but we are committed to keep grind and persevere until this thing starts to improve.

And I guess those are basically my comments. I'll turn it back over to the moderator and we will be happy to take questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions). And our first question or comment comes to us from the side Joe Gladue. Go ahead please. Your line is open.

Joe Gladue - B. Riley & Co. LLC

Okay. I was just hoping you could give me a little color on the... I guess that you know that 30 day... 89-day delinquencies. Is that spread among a whole lot out of smaller credits or whether a few large credits and maybe you could just give us sort of what industries or types of loans there?

Michael Blodnick

Sure, I'll let... Joe I'll let Barry our Chief Credit Administrator answer that question for you. He's got all the data.

Barry Johnston

Good morning, Joe. As far as the industry is going, I think it's just a given, these sales credits for divestiture by land, land development, developed blocks, primarily as far as size of the credit. I think largest credit in that category is about $6 million. But it is spread out among the affiliates. Of course the higher concentration is in the larger banks, Glacier Bank, Kalispell, Mountain West Bank and to a certain extent in the real estate market down and Big Sky Western and Bozeman Montana and... but it is truly all real estate related pastures (ph).

Joe Gladue - B. Riley & Co. LLC

I guess I was going to ask that's pretty much the same question about the increase you saw in non-performing loans for the quarter, where that stops occurring?

Barry Johnston

For the quarter it was about a $12 million increase and it was in five relationships, three spread out through this system for Idaho and Western... primarily Idaho and Western Montana. And then one down in Wyoming and one in Utah, and...

Michael Blodnick

Actually it was all four states, all four states.

Barry Johnston

And five different relationships, two of them were 4 million each and a couple... there are two smaller ones at 2 million each. Again all in all cases it was product developments, final product developments.

Joe Gladue - B. Riley & Co. LLC

Okay, Hi, thank you that's helpful. Just one sort of book-keeping question. How much was the acquired reserve you got from Bank of the San Juans?

Michael Blodnick

2.6 million.

Joe Gladue - B. Riley & Co. LLC

Okay, I think I'll step back and let somebody else. Okay.

Michael Blodnick

Thanks Joe..

Joe Gladue - B. Riley & Co. LLC

Thank you.

Operator

Thank you. Our next question comes to us from the side of Ben Crabtree, please go ahead, your line is open.

Ben Crabtree - Stifel Nicolaus & Company's

Hi, thank you. Good morning.

Michael Blodnick

Hi, Ben.

Ben Crabtree - Stifel Nicolaus & Company's

What was... I don't know if could identify but in general what's the impact of Bank of San Juans on the margin?

Michael Blodnick

Not much. The margin that we ended... Ben the margin that we ended the year with was very close to where their margin is. Their margin have been over 5% but they are pretty asset sensitive and they've seen some reduction in that margin to where I think the numbers I saw in December it was about one right on top of the other. So we didn't benefit or we didn't lose by bringing their margin on.

Ben Crabtree - Stifel Nicolaus & Company's

And you probably should (ph) know this. Is their earning asset mix more skewed towards investments than yours is?

Michael Blodnick

No, not at all. They had none.

Ben Crabtree - Stifel Nicolaus & Company's

Okay. So, the margin trend during the quarter was it fairly stable?

Michael Blodnick

The margin trend during... month-over-month, yeah, it really was. We didn't see, we didn't see a lot of deviation. We got a nice little kick right way in October and then that maintained itself pretty well. I mean within any given month, based on the way that margin's calculated, Ben you got a month like November where there is less days

Ben Crabtree - Stifel Nicolaus & Company's

Right.

Michael Blodnick

That have a little bit skewing impact. But, no I would say that for the three months during the quarter it was pretty consistent, quite consistent at a rate that was surprising to us a little bit, higher than what we had expected.

Ben Crabtree - Stifel Nicolaus & Company's

Do you have... I guess the question what percentage of your loans do you have closed and has that changed much over the last or during the last year?

Michael Blodnick

Yeah, it's continually increased. And we're just above... all of our floating rate loans were just a tad above 50% now. In fact it's getting closer to 60% that have floors. So I looked at those numbers here just in the last couple of weeks and we were a little bit below 50% last year. So we made definite gains there. And there is just no doubt then at all the banks that they are doing that kind of lending in this environment, more likely then not those floating rate loans are starting out with the flood. Barry, you got anything to add to that

Barry Johnston

No, that's... and anything talking on the books now I think we got a little away from that loan rates were up at around 9%, but as rates start moving down we... anything that came up and over and we're hitting the floor anywhere between 5 and 6%.

Ben Crabtree - Stifel Nicolaus & Company's

Mick, I was struck by your comment about the irrational deposit pricing I guess. I thought may be that was in my territory confined to Chicago, but apparently not. And you've said in several of your markets, is that... has that tended to become more from the smaller banks? And what do you think is maybe driving them behaving little better real lately?

Michael Blodnick

I think it's primarily been coming from the credit unions and all what we see

Ben Crabtree - Stifel Nicolaus & Company's

Okay.

Michael Blodnick

Although when it seems to me that when if you're operating within a market where the credit unions are paying rates that are far beyond market rates today, that you are also going to see some smaller community banks that try to compete against that. And we just chose not to. And I still believe it was the right thing to do. I don't believe we lost... if it was a relationship customer we were willing to do whatever and all the banks did this. I am a 100% confident that any relationship type customers we were not going to allow them to lose them.

But if it was a one off customer that had... was looking for the highest rate and maybe we have that CD or that money market before, we have made those changes and we've been willing to let those dollars leave the bank.

Ben Crabtree - Stifel Nicolaus & Company's

Okay.

Michael Blodnick

And obviously right now we're replacing them with wholes... more likely wholesale deposits. But it's just for us the insanity of paying 4% for a one year CD, when we could borrow money at 25 to 50 basis points, just makes no sense, so.

Ben Crabtree - Stifel Nicolaus & Company's

And have you taken advantage of the government's guaranteed debt issuance program?

Michael Blodnick

We have signed up for it. But at this point, Ben we've done nothing.

Ben Crabtree - Stifel Nicolaus & Company's

Okay. And I guess the final point in that and it is somewhat related to what you just said. I guess given how good all the rest of your numbers were I was a little surprised by the non-interest bearing deposit number. It looked pretty sluggish to me and I am just wondering what's going on there. If you have got something external or if you think you can turn it around or what?

Michael Blodnick

Like I mentioned the last two years we have increased the number of check-in accounts by 9%. That's the number of customers. And yet the pressure has been on the dollars. Now clearly, we do not have... although this last three, four weeks I am expecting, I don't have that numbers yet, but I am expecting there is gone be some spike up in balances as some of the titled companies in that work through this refinance wave.

But we've got a lot of titled companies that we had for and continue to have for many, many years and we've not... we've monitored those balances and those balances are far below where they were two or three years ago. They can couple that with just the overall economy and how tight things are with businesses and individuals. And even though we had two years of really good growth in the number of accounts and the number of relationships, but the balance... the average balances just continue to come under pressure.

Ben Crabtree - Stifel Nicolaus & Company's

Well I'll give out and let somebody else question... ask questions.

Michael Blodnick

Thanks Ben.

Operator

Thank you, sir. We'll next go to side of Chris Stulpin. Please, your line is open.

Chris Stuplin - D.A. Davidson & Co.

Good morning.

Michael Blodnick

Hi, Chris.

Chris Stuplin - D.A. Davidson & Co.

Hi. Mick can you update us or characterize, what changes you have seen in the last quarter in the markets... in the five markets in which you operate, five states?

Michael Blodnick

Well, I think that... I guess my first general characterization would be that just like the rest of the country, we're definitely seeing a slowdown. I mean I still really am, believe me I am thankful everyday that we're operating in this States versus lot of others. But that still has not made these states immune from lay-offs, from the slowdown in the general economy with virtually no volume on the sales of real estate, whether it's vertical or horizontal.

And I'd like unemploy... I don't like the unemployment rates because they're double what they were maybe two years ago, but this part of the county had absolutely some of the lowest unemployment rates of anywhere in the nation. And they're still the lowest, some of the lowest levels in the nation. I guess another positive we're seeing in Wyoming and Montana is we're just not seeing the value of real estate in some of our markets, that has taken much of a hit. In fact, just last week there was a survey conducted by the National Realtors Association that showed some of the markets in Montana where we've got some pretty decent sized presence, like Billings, like Missoula that haven't seen anywhere near the drop-off in values that maybe the Flathead Valley has or Boise has.

So we got to still feel pretty good and pretty fortunate that the five states that we're operating in are still doing pretty well. The newest addition, Durango; I think that market has definitely slowed down from a volume perspective, but values have still held up very well down there. And that economy is still doing very well. So we're excited about that entry into Colorado. We're excited about the individuals that have joined the company down there. We think we got a great staff and a great Board of Directors and we think that's going to be a very good deal for us.

But even there, just like Wyoming and Montana, Idaho, Utah, I think we've all seen some slowdown. There is just no doubt about it and I believe, Chris that 2009 like I said in my comments I just don't know if it's going to get a whole bunch better.

Chris Stuplin - D.A. Davidson & Co.

And can touch on what you seeing in CRE, C&I in you home equity lines of credit. What's happening there, please Mick?

Michael Blodnick

Well on the home equities, we continue to monitor them very, very carefully. I know Barry is constantly in contact with each of the banks, Chief Credit Officers. And as you would expect, I mean in an economy like that you're going to start to see some delinquencies now. We have seen some. But so far that is not something that has been rampant at all, not even close. So the home equity portfolio continues to hold up very well. I'll probably let Barry comment on what he's seeing out there on the termed out commercial real estate and the C&I portfolio.

Barry Johnston

Actually on our term commercial, we haven't really seen anything that giving us concern at this point not to say that there won't be some domino effect, because of our -- most of over 60% of our term commercial is owner occupied stuff and those are the Mom and Pops in our local businesses that provide services and product, primarily to all of our markets. But so far we've been fortunate.

So one of the positive points on the C&I portfolio again, same thing, nothing of major consequence there and no huge losses last year that came out of the C&I portfolio, except for one credit in the Flathead Valley.

So we're feeling fortunate there also. But not to say that going forward given this economy that we won't have some challenges down the road.

Michael Blodnick

And I guess one addition to Barry's comments. And I don't see even nationally where this has become a major problem. But of course, I mean we all know about the level of foreclosures that have taken place. But our one default family real estate portfolio is truly a legacy. I think I've mentioned this before, truly is a legacy portfolio, because it's been over ten years since we really have portfolioed much in the way of one default family real estate loans. I mean most of that production has always been sold into the secondary market and again we've primarily for the most always been just a lender.

So, what is on the books and it is still about 18% of the portfolio are one default family loans that for the most part obviously there is an exception here and there, but the bulk of that portfolio is loans that we've inherited prior to the WesterFed acquisition in 2001 which of course was the largest thrift in the State of Montana. So we've just, knock on wood, we've been pretty fortunate there to just haven't seen much stress at all in that portfolio.

Chris Stuplin - D.A. Davidson & Co.

Fantastic thank you very much.

Michael Blodnick

You bet Chris.

Operator

(Operator Instructions). And we'll now go to side of Matthew Clark. Go ahead please. Your line is open.

Matthew Clark - Keefe Bruyette & Woods Inc.

I guess first just on the borrowings side, it's looks like you paid down some higher cost borrowings, can you mentioned doing some stuff at 25-30 basis points, but can you discuss I guess in more detail the specific type of borrowings you might be interested in here and your strategy, I guess going-forward. I guess there is no real expectation or ways to go up, but just I assume you are thinking about that scenario too?

Michael Blodnick

Absolutely Matthew and I mean we're I think we mentioned last quarter. We are constantly looking at the lowest cost wholesale funding base. Now obviously on the true deposit side of the balance sheet where our all of our focus at the banks is spent almost entirely generating check-in accounts. But on the wholesale funding which is where we picked up most of the additional funding, it could be that discount window, it could be the Federal Home Loan Bank.

It could be some of the Treasury facilities TARP, TIO, I mean we're and the TIO obviously right now the government is not doing anything in that particular venue but we are constantly looking for where we can get the best deal.

Now one thing and I think in a roundabout way I think you are asking this is what are we doing well. We've been very fortunate and I wouldn't say that this was necessarily just a stroke of luck, I think we really thought, at least a year or two ago that we saw some real issues and we felt rates would be coming down, never thought they'd come down as far and as hard as they did in such a short period of time. But we did want to keep a lot of that funding short and of course that's been a very, very good thing for us.

But in the last couple months and... of the quarter, we did take some opportunities to move some money out on to the maturity curve. And we're going to continue to look for those opportunities. I mean we're... most of it is relatively short right now, less than the 90 days. But we moved some we moved pretty decent amount of money out seven years in the fourth quarter, and we may do some more of that, but its just like you said, Mathew right now boy as I read the tea leaves I just don't see rates doing anything much in the near term at all. And maybe not at all this year. In fact most of the economists we follow tend to say the same thing that these this rates are going to stay pretty tightly ranged bound over the next 12 months.

Matthew Clark - Keefe Bruyette & Woods Inc.

Okay, great and then I guess another question how confident... can you walk us through the compensation structure, how you... I guess what gives you confidence that your affiliates are alerting you of potential problems and then and bringing them to your attention and you guys are addressing, marketing, moving the term loan. I guess how confident are you that those problems are brought to the table to the Chief Credit Officers at each of the banks. And they are being forthright with you as well?

Michael Blodnick

Well I'll let Barry go into more detail. Clearly that's a great question and we get it from time to time.

Barry Johnston

I think it starts with the system that we've set up. And I am not going to spend time going through the system, because that would take far too long. But I really think that what we've developed here over last ten years, knowing that we run this decentralized model and knowing that there's always the risk of some maverick or somebody out there doing something goofy, we just can't afford that. And I think that here again every one of the banks this last year went through a full safety and soundness exam. So, I mean we had anywhere from 10 to 15 examiners in each of those banks for two weeks. So that's gives us some comfort.

We have comfort knowing that we've got an outside consulting firm, that spent a week in everyone of our banks going through a random group of loans and relationships. And then of course I think Barry is out in those banks throughout the year. And of course every Wednesday at ten o' clock we have every one of the Chief Credit Officers at a meeting that lasts anywhere from one to two hours every Wednesday, where they're going through any issues they have whatsoever classified criticized assets, delinquencies, collections.

So I mean, I think we feel... I mean there are problems out there. I mean don't get me wrong. We're not immune like I said earlier to the same issues and the same economy that everyone else is. But I feel pretty good that there are no things that are being hidden out there, that we're not aware of. But I'll let Barry comment.

Barry Johnston

Yeah, what gives... to kind of echo Mitch's comments, one thing that we really feel comfortable about is especially given the regulatory environment this time we have of our four largest banks, we have the regulatory examinations cycle at the very end of the year, was in October and November actually we just received the examination reports on some of those banks this past week.

So that gave us a pretty good comfort level, especially in regards to identifying loss and non-accrual status of loans. And so the timing on that is perfect for us. That happens every year, there would be FDIC, that Federal Reserve and the State of Montana, State of Wyoming, State of Idaho have a... do their examinations pretty much at the same time in conjunction with the coordinated supervisory review that is done at the holding company in the middle of December.

And as Mick mention, we have an external credit review consultant who does commercial credit reviews on an annual basis, spend two weeks, one week in every bank for sure, couple of weeks in our larger affiliates. So and his work has been signed off by both the regulators and our external auditors, BKD. And BKD actually steps into the banks, does a review of -- primarily the loans and the allowance evaluation every year, is actually physically in the banks reviewing those. And then reviews those on a quarterly basis throughout the year.

We supply that information to... also we get some coverage there as far as the allowance evaluation on an ongoing basis, we feel pretty comfortable that whoever at (ph) has met the test, both at the regulatory and the external auditor's level and the external credit review level too.

Michael Blodnick

One thing that Barry just reminded me, too of Mathew that obviously this has always been a burden. It's always been a huge cost, but I guess in these times... just one more thing I guess we can somewhat hang our head on and that is that again if we were a one bank holding company, we would have to deal with SOX. Time. We have to deal with SOX 11 times. I mean every one of the banks have, though we've got BKD, we've got our internal audit staff documenting, testing all the controls out there in everyone of the banks.

And having reports issued separately, separate SOX reports issued by our internal audit and then validated and attested to by BKD. So I mean the oversight I think I feel pretty good about the oversight. I think we've tried to put together a process that's pretty tight. And, I guess we can only hope that we're covering all of our bases there.

We haven't had any surprises so far this entire year, and I mean a surprise upside of all a sudden a borrower who's current and in no problem just coming in one day and throwing the keys on the desk. I mean that's always been a surprise. But we've not had any surprises where the banks didn't understand what was going on in their markets and didn't convey it to us.

Matthew Clark - Keefe Bruyette & Woods Inc.

That's great. I appreciate all the color. And then lastly, has the current environment, how rapidly it's deteriorating, changed your appetite for deals despite the offering. And given that... given your construction portfolio (ph) you still have and I guess a view that maybe there is never enough tangible capital potentially. Just curious as to whether or not your appetite has changed at all?

Michael Blodnick

I'd be lying if I said it hasn't, because I mean it's got to. I mean you look at the huge amount of capital we've build up in this company. But every day as this economy gets worse and worse and worse and this country starts to just spiral further and further down, I think it would be foolish not to be thinking that, hey may be we need all the capital in this company right now. And yes, we're still looking.

I think we are trying to be very selective in what we look at. I mean clearly if we could find more Bank of the San Juans, we would be very, very interested, but yeah, I mean at the back I think at all of our minds that we've had these discussions at the Board meeting too. I mean you got be somewhat cognizant of the fact that if this thing only gets worse over the next 12 to 18 to 24 months, you want to make sure you have lot of dry powder.

Barry Johnston

And plus, I think there is one other point that I would like to make and that is that with us, we're doing these deals that are not huge deals to begin with, especially for our size now. And that's the way we like it. We don't like to take a lot of risks. We don't like to take a lot of integration risk. We don't have any egos and say we have to get to a certain size because that never enters the equation. But we want to make sure we do them right. We want to make sure we can keep our arms around them. And these things take time. I mean I just don't think you're going to find where you're going to be able, in this company at least for us to sit there and do four or five deals a year. I think it will way put too much stress and strain on the company and probably take our eye off what we should be doing.

Matthew Clark - Keefe Bruyette & Woods Inc.

That's very helpful. Thank you.

Michael Blodnick

You bet.

Operator

(Operator Instructions). We go next to the side of Brett Rabatin. Go ahead, please.

Brett Rabatin - FTN Midwest Securities Corp

Can you here me?

Michael Blodnick

Yeah.

Brett Rabatin - FTN Midwest Securities Corp

Okay. I wanted... a kind of a follow-on that. I wanted to ask is there a minimum level that you're kind of looking at today that you would take tangible equity down to and with an acquisition of something more than 150 million in size came to fruition?

Michael Blodnick

$150 million in assists.

Brett Rabatin - FTN Midwest Securities Corp

Yeah, no I'm just asking is there a minimum capital ratio for tangible equity that you would consider kind of the new standard for yourselves, even thought you... just thinking about deals. Is there a level where you don't want to go below this in any type of acquisition?

Michael Blodnick

Not that we've actually stated, Brett. I mean, we've always, I mean a couple of years ago we always aid that we wanted to keep our tangible common equity something north of... this was back in '05- '06, something north of 6.5%.

Brett Rabatin - FTN Midwest Securities Corp

Okay.

Michael Blodnick

Obviously, we're 3% greater than that right now. Probably in this environment you've have to ratchet that up. But we haven't really said and put. That would be probably be something that would be on the table for discussion with any transaction. But no Brett we haven't said, okay we're not going to take this thing down below 9% or anything like that.

Brett Rabatin - FTN Midwest Securities Corp

Okay. And then I want to follow-up on some point there just about as the banks are talking to the customers. I was curious to hear if there is been the ability to get back and give additional sources of collateral or how the negotiations have gone with projects, whether they be land development, or resi construction kind of how that's gone the past quarter or two?

Michael Blodnick

Yeah, well actually that's a great question and what we're seeing overall is in the last quarter, or actually the last half of last year. Lot of our developers are running at interest reserves and resulting or you've seen the increase in the NPAs go up.

We have had some success stories where we either we went into the transaction at a cost basis that there were still some equity, even given some discounts and prices and the increase in absorption periods. Where we have been able to create an interest reserve, and still have an adequate margin in the collateral.

But, generally I think across the board on a lot of the product out there that these guys are running out of refinancing their personal assets or selling personal assets to carry the projects. And I think its going to be a challenge for us going forward, given what we've seen in the last 60-90 days. Especially given the fact that land values are... is really the key, the markets are key. And if this market stays soft this coming year we are going to face some challenges in and generally we are going to have to get pretty aggressive in managing those assets.

Brett Rabatin - FTN Midwest Securities Corp

Okay, thanks for the color. Great, thank you.

Operator

Thank you. We now go to the side of Ben Crabtree. Go ahead, please.

Ben Crabtree - Stifel Nicolaus & Company's

Yeah, thanks. Couple of follow-on questions. One, Mick you kind of touched on this in terms of extending some of your funding. But how would you characterize the balance sheet right now as being assets as to viability sensitive et cetera?

Michael Blodnick

Right now, I'd say that we don't have our 12/31 modeling done, but as of September 30th and granted (ph) we have done... we put on some longer assets and some muni purchases that we made during the quarter. And but at same time a big chunk of the muni purchases we made in the fourth quarter we've extended those borrowings out.

So that really shouldn't have too much of an impact, but then going to back September we were still pretty neutral. It just really didn't make much difference and of course now, what with our new model, one of the things that's going have to be taken off the model itself is a down one or 200 basis points down (ph).

That will not happen any more. So let's face it we will be only looking at... the books should be smaller this time. We'll only be looking at what could happen when rates move up. But when we look at a number of, when our consultant puts those out, I mean there is a number of scenarios we're looking at and now, we're looking... probably what we are going to look at now that we didn't do in the past is 2, 3, 4, 5 600 basis point rises and what those will do.

In the past when rates were higher we would look at one and 200 basis point down and a two and 400 basis point up, but my guess is we are going to ratchet that model in a different direction right now. But as a September those are the last numbers we have right now because it's still going to be another week or two before we see December's model. But to the best of my... till the last data we had, we were pretty neutral. It really didn't make a huge difference in our net interest income. On a consolidated basis now, Ben there are some banks that are more asset sensitive and there is others banks that are more liability sensitive but when you consolidate them it was a really pretty nice and neutral position.

Ben Crabtree - Stifel Nicolaus & Company's

Are you comfortable looking at that only on a quarter basis, I mean given the potential volatility of interest rates?

Michael Blodnick

Yeah, I mean we used to only do it every six months and couple of years ago, we knocked backed it up to a quarter. I think we if try to do it every month there wouldn't be enough changes. There truly wouldn't enough changes in the balance sheet to justify the huge amount of work that goes in because I mean we get this model back, I mean for all the banks in the consolidated there is a four inch thick book.

Ben Crabtree - Stifel Nicolaus & Company's

Okay.

Michael Blodnick

So, I mean there is lot of things that go into that and to try to do it monthly or twice a quarter would just be too much for the benefit we'd get out of it.

Ben Crabtree - Stifel Nicolaus & Company's

Okay. Secondly it seems to me that I would and I am not sure about this about continuing kind of some negative headlines about the CRO club. Do you have any exposure that's coming there, I assume there isn't any really dividend in coming out of there, but any vulnerability there?

Michael Blodnick

Yeah. I mean we got another non-earning asset again. I mean we had it for two years and we started to get a little bit of... we were up to like 1.4% dividend. Now we are back in the fourth quarter we are back, we took obviously they announced when they didn't have one. And we are not expecting in fact in our planning for 2009, not only do we not get, that was one negative that cost us just about 200,000 in the fourth quarter.

And our expectations are that there will be no dividend for the next four quarters. And as a result I mean that's way it is, and I don't see change in any time soon. I mean we're going to see, that I think at HSBC Bank (ph) is going to hold capital, its unfortunate that the marks on the mark-to-market made them do what they had to do in the first place because that's almost borders on insanity, but it's the way it is. That's what they've got to account for. And as a result, we have no expectations of giving a dividend in 2009.

Brett Rabatin - FTN Midwest Securities Corp

And how big is that position?

Michael Blodnick

Its right around, last time I looked it was 45 million I believe...

Barry Johnston

Yeah 45 million.

Michael Blodnick

45 million, so...

Brett Rabatin - FTN Midwest Securities Corp

Okay.

Michael Blodnick

And obviously again, for about two yeas prior to '07 there wasn't much in the way of dividend then either, but we are starting to get in a little bit at one, now that's gone too.

Brett Rabatin - FTN Midwest Securities Corp

And then the last question is the salary and benefits, why didn't you highlight a couple of special factors that caused the sequential decline, certainly I guess I didn't have that built in my model, trying to get a sense of was there... as some idea of how big any kind of reversal of bonus accruals might have been? And how big the drop in commission income might have been, just try to come up with a reasonable number going forward?

Michael Blodnick

Yeah I mean that the commission number is definitely down because volumes are down. I don't have that number. I know that in the fourth quarter there was at least a $1 million pretax that we benefited from the reduction in our profit sharing plan. But here again now going forward that we're expecting that, that for 2009 that profit sharing plan is going to be at a fourth quarter run rate too. Because here again as I have said, I think before to all the analysts and to many of the investors, nobody takes a bigger hit when we build capital the way we've build capital, than the 1700 employees. Because I mean we've got both our stock option plan and we've got our profit sharing plan that are both directly tied to return on equity and that's GAAP equity. And when GAAP equity is going higher and higher, it's tougher and tougher to generate the same returns. So and my guess is that both of those are going to be no higher than where they were in the fourth quarter on the fourth quarter run rate.

Brett Rabatin - FTN Midwest Securities Corp

Right.

Michael Blodnick

And they actually could be a little bit lower.

Brett Rabatin - FTN Midwest Securities Corp

Interesting, it's an interesting perspective, thanks a lot.

Operator

Thank you. We now will go back to the side of Ben... actually no. Sorry no further questions at this time.

Michael Blodnick

Well, very good then. Again we thank you all for joining us this morning. It's, I guess my final thoughts are it's I don't care how long you've been in this industry. You could be in here 40-50 years and I guarantee you haven't experienced anything like what this banking industry is going through and the changes we are seeing. As I said in my comments up here in this part of the country, where we're pretty blessed, that things have not gotten any worse than they have. And they've been actually relatively speaking not bad. But I think all of our bank Presidents, all of our Board of Directors, all of our staff are just prepared that 2009 is just going to continue to be a grind. And I don't I can't think of a better word. We are just going to keep grinding.

And we are going to have more asset quality issues. But we like the earnings momentum we've got. We like the... our ability to deal with those asset quality problems and reserve for them. So we're just going to have to see where the next couple of quarters take us. But it's... I think it's going to be real challenge. But I... again I like where we are at. I like the capital strength we've built and we're just going to keep trying to do our best.

So thank you all very much. And we will talk to all of you later. Bye now.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect at this time.

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