Executives
John J. Dickson – President, Chief Executive Officer
Lyle E. Ryan – President & Chief Banking Officer
Robert W. Robinson – Executive Vice President & Chief Credit Officer
Carol E. Wheeler – Chief Financial Officer
Analysts
David Rochester – Friedman, Billings, Ramsey Group, Inc.
Jeffrey Rulis – D.A. Davidson & Co.
Brett Rabatin – FTN Midwest Security Corp
Mathew Clark – Keefe, Burnett & Woods, Inc.
Frontier Financial Corporation (FTBK) F4Q07 Earnings Call January 24, 2008 11:00 AM ET
Operator
Good day ladies and gentlemen my name is Julie and I’ll be you conference coordinator for today’s call. I’d like to welcome everyone to Frontier Financial Corporation’s fourth quarter and 2007 earnings conference call. Throughout the duration of this presentation today all audio participants will remain in a listen only format. However, at the conclusion of today’s presentation we will be conducting an interactive question and answer session via telephone lines. This conference call may contain forward-looking statements as defined in section 27AI1 of the securities act of 1933 as amended including statements regarding among other things the company’s business strategy and growth strategy, expressions which identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on this company’s expectations and are subject to a number of risks and uncertainties some of which cannot be predicted or quantified and are beyond their control. Future developments and actual results could differ materially for those set forth and contemplated by the underlying forward-looking statements. In light of these risks and uncertainties there can be no assurance that the forward-looking information will prove to be accurate.
This conference call does not constitute any offer to purchase any securities nor solicitation of a proxy, consent, authorization or agent designation with respect to a meeting of company’s stockholders. At this time I’d like to turn the call over to John Dickson, President and CEO of Frontier Financial Corporations. You may now proceed.
John J. Dickson
Good day everyone. Thanks for joining the call and your interest in Frontier Financial. On my side here I am joined by Lyle Ryan, President and Chief Banking Officer, Carol Wheeler, Chief Financial Officer and Rob Robinson our Chief Credit Officer to assist in any questions you may have. I’d like to start out by just saying that we are very pleased with our fourth quarter and 2007 performance, earnings coming in at $0.40 per share in the fourth quarter up 5.3% from a year ago and $1.62 for the year up 6.6% from 2006. And we’re able to accomplish that again with quality earnings, an increase in our provisioning for future loan losses and net charge offs that accounted for about three basis points. So very pleased with those results and in addition, we’re also very pleased with our ranking in the Bank Director magazine. We received the number one ranking for performance of the top 150 banks and thrifts in the country and that ranking was based on profitability, credit quality and capital adequacy. With that good news though we’re also cautiously optimistic but concerned with the credit quality metrics rising and although they’re still within historic levels, I’m sure a lot of the questions will be revolving around that issue.
Before going over the quarter, I do want to talk a little bit about the marketplace here in the Puget Sound and starting off with jobs, job growth continues to be very strong. Recently in the local newspaper indicated in our head quarter county here in Snohomish County, we had added 22,000 jobs during the year which was a similar addition to jobs that King County and Seattle had and of course with the Boeing plant being just a couple of miles away a lot of that job growth centered around Boeing. They did announce in 2007 that they have a backlog in production to 2014 and their sales were around 1400 in 2007. So we feel very good about the job prospects here. Unemployment here in most of the counties we serve are in the 4 to 5% range and in some counties it’s below 4%.
Population growth continues to be well above the national average. In a recent forecast that I’ve seen from Dupre & Scott who studies a lot on the real estate market indicate that they expect in migration to continue in 2008 to the tune of about 34,000 and in 2009 by 22,000. Based on a five year projection they made, they expect the number of households to increase 9.87% over the next five years. I’m going to limit my comments to our three primary counties that the bulk of our loans are in and that is Snohomish county where our headquarters are in Everett, King county which is the Seattle area and Pierce county down in Tacoma. 77% of our construction loans are in those three counties and about two thirds of our land development and raw land loans are in those three counties.
Just to update the callers on some recent statistics in this marketplace as it relates to housing, we subscribe to a publication called RealEStats and they put together a lot of information regarding inventory sales and that. In Snohomish County in December the inventory of homes for sale was 6,600 and that compares to 8,000 in September and year ago about 4,500. Inventory levels have dropped in Snohomish County since September but are still up over a year ago. Likewise in King County 13,400 units compared to 16,600 units at the end of September and 8,500 units a year ago and again Peirce county just over 8,000 units versus 9,365 in September and about 5,900 a year ago. So inventory levels in the Puget Sound area appear to have peaked in September and we’re pleased to see inventory levels down in the 14 to 20% range in those three counties. During this time we had a drop in sales during the fourth quarter and again just some round numbers; in Snohomish County sales were about 700 units. That implies a relative inventory of 9.6 month supply of inventory. In September the sales were 946 and a year ago about 1,100. So again sales were down dramatically in the fourth quarter. King county sales were about 2,000 units compared to 2,700 units in September and 2,900 units a year ago. That implies a relative inventory of 6.6 months and in Pierce County sales were 845 units in December compared to 937 in September and about 1,400 a year ago. That implies a relative inventory of about 9.5 months on the market.
The good news is despite the drop in sales we’ve seen some pretty stable prices in all three counties and in general new homes are up approximately 2 to 7% over a year ago and existing homes have dropped off just a bit over a year ago. All the prices are down slightly from, existing home prices are down slightly from September, and new homes continue to be about equal with September’s prices. One other statistic in the market here that I want to share, because RealtyTrac seems to like to sensationalize the number of foreclosed properties out for sale, currently in Snohomish County there are 104 foreclosed properties for sale; in King County 251; and in Pierce County 292. So relative to the overall market the number of foreclosed properties really are down to reasonable levels.
Let me talk a little bit about the fourth quarter and add a little color to our press release. As far as the balance sheet is concerned our loan production fell off quite a bit in the fourth quarter. Loan originations were $255 million that’s down 30% from the third quarter $364 million and the fourth quarter of 06 was $445 million. Obviously we’re seeing a lot of construction and land development projects being put on hold and that’s effecting loan production. As far as loan growth is concerned our loans are up $291 million since the end of September and of that about $200 million of that was a result of our merger with the Bank of Salem, so organic growth is approximately $91 million which was 2.74% for the quarter or11% on an annualized basis. Growth for the year $704 million again $200 million from Salem and on an annualized basis that was a growth rate of 17.4%. Keep in mind on the loan growth a lot of the amounts that were added on to our loan totals were a result of construction and development loans that were originated in the second and third quarter of 2007. I think those loan production numbers reflect the slowdown that we’re seeing in the area and should also reflect expectations for 2008 which we expect loan growth in 2008 to likely be in the single digit range.
In addition because of the slowdown in real estate and housing we are putting renewed focus on commercial real estate loans as well as C&I loans. Before I turn the call over to Rob Robinson to talk about our credit quality I do want to emphasize that we do not and have not originated any subprime mortgages. All of our mortgages are conventional or secondary market mortgages which are sold in the secondary market. In addition, in our investment portfolio we hold no mortgage backed securities or anything that could be considered collateralized debt obligations and in addition, included in our construction portfolio we do have some custom, what we call all-in-one mortgages, construction take out mortgage loans but none of those have been originated by brokers, they’ve all been originated internally and they amount to about $43 million in our overall portfolio; so a very minimal part of our portfolio. At this point I would like Rob Robinson to talk about credit quality. Rob
Robert W. Robinson
We ended the year with a past due ratio that’s loans three days or more past due of .91% or $33.2 million in loans. The majority of that $32 million of that is in our real estate portfolio, $20.9 million of that total is in non-accrual status at this point in time. Speaking of non-accrual, we have an MPA ratio of .53% to end the year. We started the quarter with $11.3 million in non-performing and ended the quarter and the year at $20.9 million. As you may recall in our last conference we were wrapping up negotiations on a $7.1 million land development loan. We received full pay off on that loan including all default interest in late October so we were pleased to get full recovery on that one as expected. Loans moving into non-performing status in the fourth quarter were [inaudible] credit relationships totaling $14.8 million and those being we have $6.2 million loan that is secured by 33 finished lots. We have a very cooperative borrower that we’re working with on that project, very interested in getting plans redone to build that project out. Second loan is a $5.1 million residential loan lot development loan, over in Kitsap County, there’s 43 finished lots on that project that are done, 45 lots to go. It’s also secured by separate collateral besides the land itself so we’re well secured there and again a very cooperative borrower that we’re working through that project on. Then two other, one of them is out of our Oregon offices $1.6 million, nine finished town homes. Every single one of them is finished it’s just slow to sell at this point in time. We are working with the borrower on ways to get those sold and turned and then the last one being a $1.9 million five single family residence and that’s up here in our market. In that case we have five homes that are in various stage of completion, again we have a cooperative borrower there and we’re working through on that project.
John J. Dickson
I’d like to reiterate to the callers that despite our net charge off rate of 3 basis points, acknowledging the slowdown in the market we elected to build loan loss reserves up to 1.6% of loans and when you add that to our leverage capital of around 10.5% we feel very good about tackling any issues that could be coming out of 2008. Again on the balance sheet deposit growth on a linked quarter basis from September 30th was up $126 million and for the year up $490 million or 20%. I will add that the Bank of Salem added close to $170 million in deposits so excluding Salem we actually had a little run off in our deposits. It’s an extremely tough rate environment up in the Northwest and most banks including us are finding wholesale funding is much cheaper than retail funding in this market.
We did not do any CD specials in the fourth quarter and as it relates to some of our high dollar balance accounts such as escrow and 1031 exchange type of accounts, those balances are also down and our developers and builders are also are working on some of their cash reserves to keep loans current. So those are creating some pressure too. Average deposits were up $66 million for the quarter. As it relates to capital we did have an increase in capital in the quarter of $62.3 million again 10.5% leverage ratio and early in the quarter we did repurchase about 378,000 shares for a cost of $7.1 million. Since that time we have refocused on capital preservation and do not expect to be repurchasing any shares in the near future.
Moving to the income statement our net interest margin reported at 5.63% down from 5.71% in the third quarter and in the 5.63% number as indicated in the press release we did have a net recoveries from that $7.1 million loan that came out of NPAs. We recovered about $1.6 million of interest on that loan that was off-set by about $500,000 going into non-accrual so that net of $1.1 million actually added 12 basis points to our net interest margin for the quarter. Had we not had that our adjusted net interest margin is 5.51 down about 20 basis points from the third quarter. We also indicated in the release that about 57% of our loans, our variable rate loans immediately re-priceable. At year end 62% of that $2.1 billion of loans were actually at their floor.
In the prior calls I’ve talked about the fact that we have a tendency to put floors on our variable rate loans and with the move from FED on Tuesday we project that 82% of our variable rate loans will be at their floors. Now obviously, this will serve as a slow down compression on our earning asset yields but certainly as loans come up for renewal and as relationships come in and request certainly those floors are adjusted as time goes on. But just to give the callers a flavor of how our earning asset yield’s reacted to FED changes since they started in September. The average prime rate between August and September was down 22 basis points and our loan yields were down 14 basis points. So the impact of that as a percentage of the decrease in prime was about 63%. Similarly in the September to October time frame the average prime rate was down 29 basis points. The average yield on our loans was down 15 basis points. So 52% impact to our loan yields. The next FED change you can see the loans started hitting their floors. The difference between October and November, the prime was down 24 basis points. The decrease on our loan yields was down seven basis points or 29% of prime. And from November to December the average prime rate down 17 basis points. Our average loan yields were down four basis points or 23.5% of the change in prime. So the impact of FED lowering rates has been slowed down dramatically throughout the quarter and again Tuesday’s move will have some impact on us but not nearly as much as strong as it was earlier in the quarter.
We believe now that our asset liability mix is close to be evenly matched maybe slightly liability sensitive however, our cost of funds have been very slow to react based on competition. Again I mentioned provisioning for loan losses, we did set aside $6 million for the provision in the fourth quarter and that was up $3.9 million on a linked quarter basis and $3.7 million from the fourth quarter of 2006 and for the full year provision was $11.4 million compared to $7.5 million in 2006.
In the non-interest income area we continue to see good increases both from business account service charges and NSFODC’s both on a linked quarter and year-over-year. In the non-interest expense area on a linked quarter basis, salary and incentives were the biggest increase. We also had a reduction in our profit sharing of about $300,000 that was offset by the loan volumes being down and the resulting FAS 91 deferral being down about $321,000. On a year-over-year basis, salary and incentives were up $4.2 million as a result as a result of a 9.6% increase in FTE and we also had expenses related to our first year of expensing for equity compensation under FAS 123R and that amounted to an increase of about $1.6 million.
As far as 2008 are concerned we’ve been progressing nicely on our merger with Washington Banking Company, the parent company of Whidbey Island Bank. There’s been a fair amount of uncertainty that has come up as a result of our stock price being below the collar. We have been, recently have met with the Board of Washington Banking Company and both Frontier and Washington Banking Company Boards are very motivated to have this merger come together. We believe that it will be beneficial to clear up the pricing question or uncertainty that has come up and we hope to do that in the near future. And I will say from our point of view our original offer, we felt was fully priced and although we’re very motivated to have this merger continue on we won’t do anything that will substantially dilute our existing shareholders.
We are focused on credit quality. I do want to say that we have a very experienced team here. Jim Reese the head of our Real Estate Division has been with the bank for 28 years and has about 40 years of banking experience. Don Richards heads up our special assets area. He was the former President and CEO of Citizens Bank that we acquired in 1989 and Don does a wonderful job of working through any issues that we have and he has a great team with him and of course Rob Robinson does a great job for us Chief Credit Officer. Probably the biggest question mark out there for us is the pent up demand that we feel is being built up, when will that come on line? Will sales volumes start picking up this spring and result in the excess inventory’s being relieved? Certainly FED’s actions on Tuesday have helped our, we’re seeing mortgage rates for 15 year fixed below 5% and we believe that certainly should help buyers out there. Although I will say the influence that the media has on customer behavior has certainly been challenging. It’s difficult almost daily to be listening to the talking heads that are predicting gray clouds ahead. We really believe in this market, with a good sales growth and good population growth that we will see some relief on inventory levels and sales will begin picking up again here in the spring. Again I want to emphasize capital of 10.5% and reserves of 1.6 % of loans puts us in a very good position to weather any credit related issues.
We do expect slower loan growth, more focus on C&I and commercial real estate and we’re also focusing on growing core deposits to help our cost to funds and we’re in the process of introducing a new suite of products in the business checking area. We’ve introduced small business free checking and free online banking. We have a business debit card out and in the first quarter we will be introducing business bill pay. At this point I’d like to turn the call back over to Julie and we can start taking questions.
Question-and-Answer Session
Operator
Ladies and gentlemen at this time we will begin the question and answer session. (Operator instructions) Our first question comes from David Rochester of FBR Capital Markets. Please go ahead.
David Rochester – Friedman, Billings, Ramsey Group, Inc.
Just real quick on inventory data, is there some kind of seasonality there with the drop off?
John J. Dickson
Well certainly we expect sales to drop off in the December, January time frame in the Puget Sound. The inventory drop off I can’t really comment on that being seasonal. We don’t know how many houses may have been on the market and pulled off but it was very encouraging for us to see those gross inventory levels come down. And, based on what we’ve seen from the supply side of things certainly the developers and builders that had not started projects held off on adding those projects. So there is always that lag factor there and I’m not sure how much of that has to do with the end of December inventory. Rob do you have any other?
Robert W. Robinson
No. The thing is we do believe that there is pent up demand right now in talking to some of our experts out in the field, I guess you could call them. The question is where are these people staying at this point in time as they migrate into our community for job growth?
John J. Dickson
I guess the other comment that we’re hearing just on the street is, in talking with title and escrow companies and realtors is just since year end they have seen a pickup in activity, more people coming back for a second or third time looking at houses. And so I guess the whisper on the street is that activity seems to be picking up here.
David Rochester – Friedman, Billings, Ramsey Group, Inc.
On the watch list you guys are giving a lot of great detail in terms of delinquencies and what not. I was wondering if you could quantify what that watch list is at the end of the quarter? And, maybe what the change was during the quarter?
Robert W. Robinson
Are you talking about the classified credits?
David Rochester - Friedman, Billings, Ramsey and Company
Yes. Exactly.
Robert W. Robinson
Okay well on our classified credits we had an increase for the quarter of $13 million. $6.9 million of those credits came out of our Oregon purchase. The rest of those credits, for the most part are real estate related and what else could I answer on that for you?
David Rochester – Friedman, Billings, Ramsey Group, Inc.
That’s good. Let’s see and just a general question for 2008, you had about $1.1 billion in originations in the first half of 07 with an additional billion in the second half of 06 and as you’ve indicated and we all know the market’s deteriorated since then. Assuming that absorption rates were to remain at current levels, below normalized levels and keeping in mind what house prices have done since mid 07, would we expect that as these loans come up for renewal that we would see a more meaningful shift into sub-standard and MTA classes? And, if so where do you anticipate that ratio going?
John J. Dickson
Well Dave I wish I had a crystal ball. We’re monitoring those loans very closely. I think the answer to that question lies in what’s going to happen in our marketplace. Again, we truly believe that there is pent up demand and sales will be picking up shortly. But it will take us several months to work through the supply of inventory that’s out in the marketplace right now. This has been a slow time for the builders and developers and certainly a lot of them are starting to feel pain as far as the carrying cost of their inventory and I don’t want to paint a rosy picture in the respect that we expect there are going to be some of them that are going to be challenged in 2008 and we’re prepared to deal with those. But I really, I don’t feel comfortable predicting what that might be at the end of the first quarter.
Robert W. Robinson
No but as far as the markets concerned be aware that as I’m sure you are that Frontier Bank has always taken a very aggressive approach to identifying its problems early on and a good example is in that non-accrual number that I gave you a significant portion of that was 43 days past due and we moved it into non-accrual whereas some of our peers might wait until 90 days to identify that. So we do take very quick action when we do identify the problem. So back to your question as far as loans going into classified credit, there is going to be some activity in classified credit throughout the year especially if the market doesn’t improve although as John said we’re anticipating the market improving.
David Rochester – Friedman, Billings, Ramsey Group, Inc.
Okay. Well if we were to see some kind of an up kick, a more meaningful up kick as those loans come under more scrutiny here in the first half, do you have the work out staff that you would need? Do you have some additional capacity with your infrastructure right now? Or would you need to bring on new lenders do you think? Or not new lenders but new credit officers?
Robert W. Robinson
Dave this is Rob. My opinion is that we have the staff right now to handle the volume of problems that could occur next year or at least in expectation of that. One of those benefits we have as John was describing, we’ve got a lot of seasoned veterans in key positions throughout the bank that have been through a minimum of two business cycles like this and many of them three business cycles and most of them with the same entity so they know the customer base very, very well. We also have the benefit of people for example in our credit administration group we have an individual that was a special assets expert at his previous life at Bank of America that we could bring in to fill if we needed to as well. So no, we’ve got the staffing we need.
John J. Dickson
And Rob I’d like to add in our real estate division because of the slowdown in originations we’ve also recognized an individual to spend part of her time monitoring the loans as opposed to being strictly in production. So, I think we’ve got some available expertise with in the production area that can shift over easily and help on the monitoring and collecting.
Operator
Thank you. The next question is from Jeffrey Rulis from Davidson. Please go ahead.
Jeffrey Rulis – D.A. Davidson & Co.
John, I wanted to follow-up on the variable rate loan information that you had. Again that was about $2.1 billion variable rate loans and about $1.3 billion at their floors?
John J. Dickson
Is that year end?
Jeffrey Rulis – D.A. Davidson & Co.
Right.
John J. Dickson
Yes that would be about correct. Yes $1.3 billion.
Jeffrey Rulis – D.A. Davidson & Co.
Okay. So the $800 million remaining variable rate not on floors, if you assume, who knows but maybe 50 basis points cut next week what would that do to that remaining $800 million? Is that possible to have that data?
John J. Dickson
Sure. We’re about 63% of our loans at their floor at year end and with the 75 basis points our year end reports indicated we’d be up to 81.7% at their floor and with any other increases or decreases next week or in the future it would be 82%. We pretty much everything that had a floor on it has likely hit its floor with this last change. Another way to put is about 18% of that $2.1 billion or about $400 million does not floors, the other $1.7 billion is likely at its floor today. Now again, I cautioned in my comments that that helps to slow down the margin compression but certainly, especially with these dramatic rate drops our customer base certainly has become more rate sensitive and you know it’s not a end all solution for us there’s certainly negotiations. And at loan renewals those floors do come down.
Jeffrey Rulis – D.A. Davidson & Co.
Okay got it. Okay then one other question, do you guys have monthly margin averages for the quarter?
John J. Dickson
Yes. These numbers will be based on a 33/60 base. We saw, because of the recovery of the $1.6 million in interest in October we saw a margin of 619 on that month, in November a margin of 538 and in December a margin of 536. Although I will point out, the majority of the $52e$,000 in interest reversals from loans being put into non-accrual occurred in December so if you normalized for that it would raise that margin up I believe about six basis points.
Operator
Thank you. The next question is from Brett Rabatin of FTN Midwest. Please go ahead.
Brett Rabatin – FTN Midwest Security Corp
Question for you first, you were talking earlier about the inventory and housing and I’m curious, I’ve been asking some other people, I was wondering if you might have estimates for lots inventory? Or, raw land? Obviously, a lot of these projects end up being completed but at some point they’re not quite completed so I’m curious if there is a meaningful difference in what you might see in terms of lots that are available?
John J. Dickson
Unfortunately, we haven’t found a good source of monitoring lot inventory out in the Puget Sound area. I don’t know Rob if you can add any color to where your thoughts are on the marketplace? But we don’t have what we consider a reliable source on that.
Robert W. Robinson
No Brett we don’t. It’s really, really, really difficult to get your arms around that and I don’t know that there’s a data source out there for us to even go out and find for those kinds of numbers. Internally we track it by dollar amount and by lot production but not externally.
Brett Rabatin – FTN Midwest Security Corp
Okay, that seems to be congruent with what I’ve heard. So I’m not surprised to hear you say you don’t have a source. And then secondly, you mentioned obviously growth this year is going to be in the C&I loan book. I mean just, looking back at the past year or two and construction and where it was 2006, 2005. I’m curious, I know you do a lot of business with some very established folks you’ve known for years, but was curious if you could give any color on who you might have added on the construction side the past year or two? And, if you pulled those people from other community banks or larger banks? And, just sort of color on the growth of construction operations the past year or two?
John J. Dickson
Well that’s a tough one to answer too. Let me answer it this way, we have added to our staff periodically some lenders that are in the real estate areas and it’s not uncommon for those lenders to bring some of their long term relationships with them. So I think at one point we tried to look and determine what percentage of the volume could have been from new relationships that were brought in by either new lenders or just new relationships. I want to say that was in the 20 to 30% range. Rob is that right?
Robert W. Robinson
Yes that’s correct.
John J. Dickson
Any other comments for Brett on that?
Robert W. Robinson
Brett you’re probably thinking back to a few years ago when we added our Tacoma real estate office and brought in a team there. We haven’t done anything like that in the last two years.
John J. Dickson
Well we got Bill down in Seattle that’s brought in a good book of business.
Robert W. Robinson
But individual like you’re talking about John.
Brett Rabatin – FTN Midwest Security Corp
With the 25 to 30 and I’m sorry I didn’t make it very clear but, would that be a function of new lenders? Or, would that be a function of new relationships with construction people? Or, what might that number represent? I’m sorry I didn’t quite get that.
John Dickinson
I think that’s more a function of new lenders but there could be some new relationships in there too.
Brett Rabatin – FTN Midwest Security Corp
Okay and then just lastly I wanted to get some additional clarity if I could on the movement of the loans to non-accrual. You indicated obviously the 30 past due and the delinquent and classified obviously looks like those numbers are still fairly low but the NPA’s moved up some and I’m just curious if you can give any color on, was there anything that ya’ll had in common? Or, just say the market’s slower so you felt it was prudent to move on non-accrual given it may take longer than expected for those particular credits to work out?
John J. Dickson
I’ll make one comment and let Rob comment and that is the one common thread that we’ve seen is that it seems to be the smaller builders, the one’s that do maybe five or 10 homes or 20 homes in a year. It seems to be the smaller ones that have been hurt with cash flow sooner than the large builders that I think have a lot more sense of the marketplace. They’re a lot more vertically integrated in the respect of they may be supplying their own lots and so on. Rob do you have any more color on that?
Robert W. Robinson
Brett, I’d just add the other communality which really isn’t a credit admin thought process but, if you notice as I’m describing these loans in every case we have cooperative borrowers. Which is a common thread throughout these, besides the things of course, that John brought up. So working through these may be a little more streamlined than you’d find with some of our peers that are working with borrowers that aren’t so cooperative.
Operator
Thank you. The next question is from Mathew Clark of KBW. Please go ahead.
Mathew Clark – Keefe, Burnett & Woods, Inc.
Can you just give us a break out of the mix of the $255 million originations this quarter by type? It would be helpful.
Robert W. Robinson
Well yes, I think John went over that briefly earlier.
John J. Dickson
I didn’t go over the actual types. We don’t drill down all the way down to all the exact types. We did look at of that $254 million, what amount was related to construction or land development? Which was maybe where you’re heading with this and our estimate was somewhere in the $90 million range is the amount or the level of that $254 million that was in construction and land development. So if you look at that relative to our loan growth and the percentage that has been in construction and land development, obviously our growth this last year was probably 80 to 90% of it has been in that construction land development arena and obviously the originations in the fourth quarter were down more in the one third range.
Mathew Clark – Keefe, Burnett & Woods, Inc.
And then as a follow on what level of comfort can you give us and others about the more recent [inaudible] project construction related land and development and acquisition projects that you guys are pursuing more recently? Just because you know in this environment, obviously anybody that sees any type of construction growth, they tend to run for the exit doors.
Robert W. Robinson
Sure, well I can tell you from an underwriting standpoint the ones that we added over the quarter, and in fact over the last two quarters have been very carefully underwritten and the projects that we have agreed to do are only for very best customers that we’ve done business with for a long time and that have the capacity to move forward even in a market like this.
Robert W. Robinson
Does that answer your question?
Mathew Clark – Keefe, Burnett & Woods, Inc.
Yes.
John J. Dickson
If I could add too Mathew, certainly our underwriting standards have tightened up. We’re really scrutinizing the LTVs and other things, capacity of the borrower to sustain a slower market. But we’re in a relationship business here and it would to me be irresponsible to say we’re not going to make any more construction or land development loans here. That’s the kind of panic that the media wants to see out there and we have some very good borrowers, some very strong borrowers that have been through many cycles and can sustain this marketplace. So we’re in it for the long haul and I believe it would be really irresponsible to cut off our best borrowers just because the marketplace is a little bit squeamish.
Mathew Clark – Keefe, Burnett & Woods, Inc.
That’s a good point. And then finally can you try and give us a sense for your, maybe size them up with the type of borrower and maybe underlying collateral that backs them. But just trying to get a flavor for and an update and how it relates to maybe your top five construction borrowers these days in terms of relationship size and so forth? Not by name obviously.
Robert W. Robinson
Quite frankly some of our biggest customer’s relationships still remain in the Pierce County area. They’ve done very well down there, they continue to do well. These are relationships that approach $50 million in commitments, that’s multiple projects so far out of that portfolio of customers they’ve remained very solid. We’ve of course, again like I mentioned a little bit earlier we’re being very careful with new projects going forward. Underwriting them very carefully, looking at their entire relationship, not just with us but with there other lenders to make sure that there on track with them as well.
Operator
(Operator Instructions) The following question is from Dave Rochester of FBR Capital Markets. Please go ahead.
David Rochester – Friedman, Billings, Ramsey Group, Inc.
Just one quick follow-up, I know you’ve said in the past that normal residential construction is about 85 to 90% of the total construction portfolio. Is that accurate?
John J. Dickson
I believe so. Just to give you some year-end numbers here, residential construction one, four family at year-end we had commitments of $1.27 billion and outstanding of $706 million. In what we classify as condo and apartments, we had committed of $397 million, outstanding $253 million. So if you add those two together it should come in around total commitments of about $1.5 billion and outstanding of about a billion. And on the commercial side, commercial construction we have commitments of $114 million and outstanding balances of about $72 million. So commercial levels do represent a pretty low percentage.
David Rochester – Friedman, Billings, Ramsey Group, Inc.
And that percentage would probably hold for the rest of the land development and the completed lots I would imagine? Or that’s primarily residential as well?
John J. Dickson
What I was referring to was purely the construction portfolio. Land development just to give you a ballpark idea current note amount totals $700 million, $640 of that is residential and $61 million commercial so again about a 90/10 relationship and the current balances outstanding of $541 million are similarly relationships for 86 residential and 55 commercial.
Dave Rochester – Ftn. Capital Markets
Okay. So for that grand total that’s just related to residential, what portion of that, you had mentioned you had seen more weakness earlier with the smaller builder, five to 10 or 20 homes, what portion of that portfolio would you say could be characterized that way, as smaller builder?
John J. Dickson
Boy, tough question.
David Rochester – Friedman, Billings, Ramsey Group, Inc.
Just Ballpark?
John J. Dickson
If I had to guess I’d say maybe 50 to 60% is the smaller builders.
David Rochester – Friedman, Billings, Ramsey Group, Inc.
Okay.
Robert W. Robinson
I’d agree with that.
Operator
There are no further questions registered at this time. I would now like to turn the call back over to Mr. Dickson.
John J. Dickson
Again, I just want to reiterate that we’re very pleased with out 2007 results. We do have some challenges. The industry has challenges in 2008 but we feel that were well positioned to take on those challenges. We’re very excited about our pending merger with Whidbey Island bank and look forward to closing that hopefully by the end of the first quarter. With that again, thank you for your interest and if there are any additional questions don’t hesitate to call any one of us here at Frontier Bank. Have a good day.
Operator
Thank you. The conference is now ended. Please disconnect your line at this time and thank you for your participation.
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