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Glacier Bancorp Inc.(NASDAQ:GBCI)

Q4 2007 Earnings Call

February 1 2008 11:00 am ET

Executives

Mick Blodnick - President and CEO

Don Chery - Chief Administrative Officer and Executive Vice President

Ron Copher - Senior VP and CFO

Barry Johnston - Senior VP and Chief Credit Administrator

Analysts

Matthew Clark – KBW

Brett Rabatin - FTN

Jim Bradshaw - D.A. Davidson

Ben Crabtree - Stifel Nicolaus

Operator

And welcome to today's teleconference. At this time, all of our participants are in a listen-only mode. Later, there will be an opportunity to ask questions during our question-and-answer session. Please note that this call may be recorded.

I will now turn the program over to President and CEO of Glacier Bancorp, Mick Blodnick. Please go ahead, sir. 

Mick Blodnick

Welcome, and thank you for joining us this morning. With me this morning is Don Chery, our Chief Administrative Officer and Executive Vice President; Ron Copher, our Senior Vice President and Chief Financial Officer; and Barry Johnston, our Senior Vice President and Chief Credit Administrator.

As some of you know by now, last night, we reported earnings for the fourth quarter. They were record earnings not only for the fourth quarter, but also for the full year of 2007. Our diluted earnings per share for the quarter were $0.34. That was an increase of 6% over the prior year's quarter, and for the full year 2007 we earned $1.28 overall and also a 6% increase over 2006.

Some of our profitability ratios were fairly consistent from prior years. We produced a ROA for the quarter of 1.51% and an ROE of 13.74%, and for the full year our ROA came in at 1.49% and Our ROE of 13.82%.

As many of know if you do the comparisons from last year to this year, our ROE has slipped some from 2005 and 2006, part of that is a function of the capital that we have been building within the company. During these definitely challenging and unsettled times Board of Directors of GBCI and the senior staff have felt that, probably having a little higher capital cushion in these uncertain times is maybe not a bad thing. So a capital has been build in over the last year/year and a half.

It continues to be a difficult operating environment out there for banks; however, so far we have been able to navigate through these challenging times in pretty good shape. Asset quality remained basically unchanged during the quarter and year. We did see a slight increase in NPAs.

On a link quarter basis our NPAs at the end of the year at 0.27%, that was up from 0.24% at the end of the third quarter and up from 0.19% at the end of December of last year. However we did go back and looked at our quarterly NPAs over the last two or three years and that 0.27% is right about in the middle of where we have been. So we've been very fortunate that we have able to maintain a level of NPAs at a relatively consistent point, and they haven't moved too much one way or another.

Our net charge-offs for the year were 0.06%, that was higher than the 0.02%, we charged-off last year and the year before. But it was also our third best year ever for net charge-offs. So we don't feel real bad about the fact that we charged-off 0.06%. It was far below our goal each year of 15 basis points. So for the third year in a row, we were able to at least achieve our goals on the net charge-off front.

Of those net charge-offs, about half of those were attributed to the third quarter. The other half of what we charged-off was charged-off in the fourth quarter. You never like to -- and believe me, we do not like to charge-off anything. But when you looked at our charge-offs for the year, about 5 of the 6 basis points in charge-off came from two credits that we had inherited from an acquisition a couple years ago, try to nurse those along, and finally decided this year to charge those off.

It's still in our minds, says that so far of the credits that we originate here in the company, the net charge-offs have still continued to be very, very low. The net charge-offs that were originated by us amounted to only about $500,000 this past year, and they were spread among a lot of smaller credits.

So in these times, again, we feel a little bit more comfortable, and hopefully it’s a confirmation of what we do here and the way we analyze credits. All credits of any size go through a multi-tiered approval process, and we have been doing this for many years, and it seems to work very well for us, and we have obviously, especially now have no intensions of changing the way we have been doing things over the last eight, nine years.

Again our loan loss reserve ended the year at 151, we believe that we analyzed that and at this time we believe that, that is an adequate reserve for what we are seeing out there. And again we just talk about this over-and-over, but all 11 banks -- all 11 bank's Presidents, all 11 of the Bank's Board of Directors and each of their Chief Credit Officers and lending staff are definitely committed to continue to work very, very hard in keeping both these NPAs and net charge-offs contained.

We just hope that all through the work that we have done and the way that we approach credit that, that will be the case. Sequentially our net interest margin increased this quarter, in the fourth quarter by 2 basis points to 4.52%, and for the full year our margin was up 6 basis points. We had a net interest margin for 2007 of 4.50%. This increase in our net interest margin also helped to improve our net interest income last year, which grew by 16% during 2007.

Hopefully in this current rate environment, it’s difficult to access the impact going forward to our net interest margin. Hopefully we won't experience a great deal of contraction this coming year, but the chances probably of seeing in this rate environment and with the slope of the yield curve, the chances of seeing further re-increases to the net interest margin are probably less likely.

So we don’t project out as to where rates are going, we try to manage to – we kind of manage the balance sheet in such a way that, again, as many of you know that it’s neutral that we are protected or we have at least considered rates moving up or down and don’t try to make any interest rates debts one way or another.

The next point I guess I want to make was non-interest deposits actually decreased from the previous quarter and from the same quarter last year, and of course that's something we worked very, very hard on it at this company and with all 11 of our banks, as to continue to increase our DDA balances and our low cost checking account balances. That’s become a much more difficult task last couple of years as rates moved upward.

If there is some good news in this, is that, the number of checking account customers this past year, both personal and business accounts increased by 9%. So, we did increase the number of accounts even thought the dollars were lower. We've had a number of accounts that are still, of course, customers of our and good customers of ours. But those balances have decreased over the last year/year and a half. So they are not maintaining the same level of DDA balances they once were. But it was encouraging to see that the number of customers and number of checking accounts that we have in the company did continue to increase last year.

I believe that because of this 9% increase in the number of accounts, it was one of the key reasons and one of the main contributors to our fee income, which increased by 17% over the same quarter last year, and 23% over all of 2006. So we feel good about we were able to accomplish on the fee income front. Again, we give a considerable amount of the credit to the fact that we are dealing with more customers both on the loan side and on the deposit side. And we were able to really take advantage of that increased customer base last year.

Probably, another bright spot for us, definitely something we've been working very, very hard at is, our efficiency ratio decreased to 53% from 55% of prior quarter, and 54% for the same quarter last year. Back in 2006, we saw our efficiency ratio really ramp up on us from the low 50s up to that 56%, 57% range. We've been able to work that back down, and we're still not where we were once before. But again, as I've said before in these conference calls, if you factor in the stock-based compensation expense that we have these last two years, that we never had prior to that, I don't believe our efficiency ratio was that far from some of the lows.

So, I think that all of the Bank Presidents, and the staffs and the Board of Directors of the banks have worked very hard to really be able to control our overhead and at the same time with that lower over head cost still produce increases in the revenue stream.

Our de novo offices in the past two years continued to gain traction and that's another reason, I believe our efficiency ration is kind of little bit better, is because they are not the drag that they once were. Each month that goes by, those new offices just are showing more growth, more earnings, and that's also helping this efficiency ratio.

Hopefully this trend will continue to improve overtime.

We are also benefiting and not all year but specially towards the end of this past year, I believe we have benefited from the completion of the seven bank complete data conversions that we did this year. Upbringing all of those banks onto our core operating system has absolutely helped. Made us more productive and more efficient. And then again in the second half of the year we implemented Check 21. And that's also helps some, but I guess our hope is that, that even benefits 2008 and beyond in a much more increased manner.

So here again we believe between Check 21, between the consolidation of the data processing and some of the new and exciting technology that we are looking at right now, that this productivity continues to be enhanced.

And I will probably stop and open up to questions in a second, but there is no doubt the states and the economies that we operate in, which primarily Wyoming, Utah, Idaho and Montana .Those states continue to do well. The activity has slowed probably from the prior three years, but historically that activity is still quite good. Our banks have done very good job of focusing on their markets; I think on their communities and their customers, and of course that will not change. This model is built on that promise and we are absolutely committed to staying true to this model.

In 2008, we hope to see some light at the end of the tunnel, I just hope it’s not a train, and we're not perfect and we're never going to be perfect. There is going to be some bumps in the road as we move forward. We don’t know exactly if we're nearing the bottom for this industry or if we still got our ways to go. But I do feel confident that we've got the quality of people and the staff, that’s going to allow us to manage through any of these hurdles or challenges that we have to face. We've done a pretty good job up to this point, and I do not expect that to change.

So with that I think I’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And it looks like we'll take our first question from Matthew Clark of KBW Please go ahead.

Matthew Clark – KBW

Good morning

Mick Blodnick

Hi! Matthew

Matthew Clark – KBW

How are you doing. Can you first touch on or just discuss how your commercial loan yields were able to hold up or just keep to that 4 basis points decline, and maybe just touch on the overall outlook for loan yields that the Fed has cut quickly here 125 basis points, just wondering, I guess if there is a lot of loans embedded in than that commercial line, that might be hitting floors or if there is a higher component of commercial construction in there?

Mick Blodnick

I'm not sure that a lot of our loans have hit floors yet. I mean obviously many of our banks have floors embedded in their rate structures, in their pricing structures. I think that to answer you very first question, every one of the banks get together on a weekly basis, and not that pricing is the number one topic each and every week, but

I know it's discussed by Barry and the group of Senior Credit Officers. And I think there is a level of competition to try to maintain pricing at adequate levels. And for most of 2007, I mean it wasn’t until the fourth quarter when we saw a real drop off in interest rates. We were able to do that.

Yeah, I think part of that could be a construction component that makes up a part of those higher yields, but we've had that construction component out there for a lot of quarters prior to this, and we've just been able to maintain. And I think one of the reasons that the margins probably did hold up better, is maybe not even so much on, while the yield on earning did hold up, you are right, it didn't go down much. The margin probably held up well because we tried to do the best job possible on our funding side. I think the banks really do a good job in that respect, and with some of our wholesale funding, we've tried to maintain levels of pricing and looking around on the wholesale front to make sure that we are funding these banks at the lowest levels possible.

I would expect now that we have seen the rate reductions over the last 10, 12 days; that it is probably going to move more and more of our commercial loans closer to floors. But that doesn’t mean a lot anyway, because they move to the floor still doesn’t stop customers from coming in and wanting to negotiate or change rates or change the deal structure. So we are going to have to be prepared for that.

Obviously we saw a tremendous amount of that back in '02, '03 and '04 and this may be another cycle where we have to deal with that. And during that cycle of '02, '03, '04, we did see our margin slip some. It was always able to stay above 4%. Is this time any different? I can't say Matthew. But I think it was a combination of some things that were able to allow us to maintain the margin where it is.

Like I said in my opening remarks, I am not so sure in this radiant environment and with this yield curve that it's prudent to say that that's going to continue. I would suspect that we will see some compression.

Matthew Clark – KBW

Okay. And then can you give us better granularity on the construction book. I figure it's about 27%, 28% of loans. As it relates to, how much of it is maybe single-family resi, how much is land development, how much is raw land, how much is commercial construction. I guess, however, you want to define it, but just better visibility would help there, and maybe also just as a follow on if you could give us you guesstimate of what the spec component or the speculate components might be and that will be very helpful, and maybe how its migrating.

Mick Blodnick

Yeah we do have -- Matthew we do have those numbers, I don’t have those in front of me. Is that something that you'd wanted. Just call in later and we could give you those numbers.

Matthew Clark – KBW

True, it’s great

Mick Blodnick

I know we've got them because we've been looking at them, and I am getting prepared to go out next week so I don’t have those in front of me here as well.

Matthew Clark – KBW

Okay. Can you may be just comment on just your overall – what you're seeing in terms of risk grading as related to, if you just want to pass out the resi construction book for example?

Mick Blodnick

Yeah I would say that the residential construction that were in two or three markets where residential construction was a big line of business, I think when you are talking about appearing to flat it, when you talk in about the treasure valley down in the Boise area, when you are talking about Bozeman. Those were areas that were good construction lending markets for us. There is no doubt that that construction lending has slowed down.

We would expect going forward that there maybe some things that we are just going to have to work through, but through the end of the year so far, you can tell by the numbers, things have been reasonably solid. It’s not the market that it was a year or two ago and we don’t expect that 2008 is going to be that kind of a market either. It’s going to be similar to probably the last six months of '07. There's still inventories out there in these markets that are going to have to be absorbed.

We kind of like some of the trends we are seeing in Boise right now based on last couple of weeks, it's looking as though some of that inventory is being worked up. Some of these other areas of course never saw that high level of inventory. I guess on construction side, it looks a little bit better, as far as absorbing some of the construction and spec loans in these areas, than the lot in development loans.

So I think it's still a number of these areas have a huge backlog or significant backlog of lot loans, and there again with lot loans, it's going to really depend up on who the borrower is, what kind of staying power the borrower has, and again, a lot of that's going to depend up on the kind of underwriting that we have done over the last couple of years.

And even there, we've had some hiccups in the past, and often times they are not even related. We're not immune to a death or an accident or something like that that comes up, when we've had some of that happen, which has turned credits upside down. We're going to have some credit where, if this market continues to extend out, and god forbid gets worse, you're going to have some additional credits that we're going to have to work through.

I do, and I believe Barry would conquer with this, we may see NPAs continue to tickup through 2008. Do we see right now drastic increases? No. Do we see where net charge-offs are going to be a huge problem? Currently not at this time. But again, I just don't know how much deeper this housing prices is going to continue.

But I do like the fact that again, this model we've got 11 individual banks focusing on their individual markets and they know those markets very well and they know the players in those markets and we hope that, that's going to add value in this whole asset quality area as we move through 2008. Barry, you have any other comments on that.

Barry Johnston

No, I think we have been very fortunate having the markets that we've been operated in. And there's one of the things that we've also maintained over last several years, during what was considered to be boom years in the real estate market. We were able to maintain our underwriting standards without getting too aggressive.

Now there is always an exception here though, but here and there. But generally across the board we maintained our loan-to-value ratios and our debt service coverage ratios, and also on most of the construction side we maintained the criteria that the builders or developers have some kind of interest reserve to carry these loans through a slow period, which of course as you are all aware we are seeing.

So up to this point generally with the exception of one or two credits have been able to do that. Have been able to carry interest and continue through what appears to be a fairly slow selling period.

Matthew Clark – KBW

Okay, great. And then finally do you just happen to have your 30 to 89 days past due at the end of the quarter, that I think were about $18.7 million last quarter.

Barry Johnston.

Yes, we do. 30 to 89?

Matthew Clark – KBW

Yeah.

Barry Johnston

Well let's put it this way. 30 to 61 is 0.64, 60 to 90 is0.11, and 90 plus and 91 plus is 0.26

Matthew Clark – KBW

Is that of assets or of loans?

Barry Johnston

That’s of loans.

Matthew Clark – KBW

Okay thank you

Mick Blodnick

Yeah and when I look at total past due loans Matthew we're showing 1.01 at the end of the year for total past due loans

Matthew Clark – KBW

And that’s versus what you do –

Mick Blodnick

The days greater. That includes the 90 days and greater also.

Matthew Clark – KBW

Okay, thank you

Barry Johnston

And that compares the

Mick Blodnick

[0.80] the quarter before.

Barry Johnston

Right.

Mick Blodnick

But in a quarter it’s lower than it was in October and November. So

Operator

Okay. And we'll take our next question from Brett Rabatin of FTN. Please go ahead.

Brett Rabatin - FTN

Hi. Good morning Mick.

Mick Blodnick

Hi Brett

Brett Rabatin - FTN

I will say congratulations, I haven’t gotten to say too much this quarter. Though I've seen it too much, but I will give two of those obviously strong earnings in the environment. I didn’t want to go back to net charge-offs and your allusion to the part of them being from past acquisition. Is that Sanders County and Beaverton County area Montana or is that –

Mick Blodnick

It was at Sanders County

Brett Rabatin - FTN

Sanders County. Okay, all right. And then from the link quarter perspective, it seems like personnel expenses were a little lighter than at least had expected and so I was curious if there were any reversals that would have impacted the fourth quarter or just any color on a $19 million run rate or assuming it will be a little higher than that going forward, but just any color on the fourth quarter number?

Mick Blodnick

You bet. On the fourth quarter, there was, and thanks for what you had to say. I mean it was in our minds it wasn’t the year that we set out to have, but we never expected that 2007 was going to be the year that it was for banks.

A lot of our incentive plans are tied to our return on equity and how well we return and what the level that return is to the equity that our shareholders have provided and invested with us. And with that coming in lower this year, obviously, it did have an impact on some of our bonus and incentive plan, so those were lower than they have been in prior years. So that was definitely part of it.

Again, I also think that we've tried to be as productive as possible, and I think from a hiring perspective, I think the banks have done a really good job of making sure that they are as productive and efficient as they possibly can out there. But one of the key things that we can absolutely point our finger to is the fact that some of the incentive programs that we have in place were not at the level they had been in years past.

Brett Rabatin – FTN

Okay. And then I wanted to go to loan growth. Obviously, loan growth was pretty strong in '07. I did notice that their current real estate portfolio was 725 versus average of 799 for the quarter. Can you give us just kind of your thoughts on the current environment seems like single-digit type growth. Is there any reason to expect you guys to continue double-digit growth, or some thoughts maybe on the loan pipeline?

Mick Blodnick

No. I don't think so. To be quite honest, perfectly frank, the fourth quarter surprised us, we didn't expect that it was going to be as good as it was. In fact, the entire year 2007 Bret was better. We were projecting 10% loan growth for 2007, we came in at a 11, and really when we even projected 10% we thought that, that was really going to be an ominous task to get that done and came in a little bit higher. Lot about was the fact that the fourth quarter which historically has been slower along with the first quarter, the fourth quarter was just a lot stronger for us. Some of the banks really had some good loan growth in the October, November, December time frame.

I think that's already starting to show signs of slowing down, and then the other thing is, we are having real winter this year too. The snow levels here are probably the most we have seen in 6 or 7 years. So that's probably having some impact. Although I am not so sure in the current market that residential construction and that is being hurt that much because of the seasonality, I think it's more just the overall dynamics of that industry right now.

So yeah, it was. We were surprised, but I would not expect that kind of growth moving forward. And we are sure not projecting that kind of growth for 2008 in our loan portfolio.

Brett Rabatin - FTN

Okay. And I also would like if you make some calls about the construction portfolio and just the dynamics of how much is commercial versus residential later in the day that will be great. The one, I know you pulled back from Boyce long time ago in terms of commitments, but I also get a lot of calls on how much exposure you have to that market in particular. So if you're making calls on those numbers please give me a call too?

Mick Blodnick

We'll give definitely give that to all of you.

Brett Rabatin - FTN

Okay, great. Thanks

Mick Blodnick

You bet Brett

Operator

And we'll take our next question from Mr. Jim Bradshaw of D.A. Davidson. Please go ahead sir

Jim Bradshaw - D.A. Davidson

Good morning, thank you

Mick Blodnick

Hi Jim

Jim Bradshaw - D.A. Davidson

Hi Mick. Could you talk a little bit about what your management response is going to be to the rate cuts or the things that you are going to actively work on, on both sides of funding and loan yield side? And I also wondered if what you've done so far I guess on deposit rates. I looked at the yield analysis in the quarter, and it looks you got a little bit of room cut now in saving accounts, but certainly not a 125 basis points. So just wondered sort of how you're going to manage through this near term issue?

Mick Blodnick

Well that’s a very good question. We just had a meeting yesterday with all the Bank Presidents and that was one of the key focus, now that we know what took place at the last FOMC meeting and what we're facing now with a 125 basis points reduction in 9 or10 days. I think all the bank Presidents and their staffs are truly doing some very impressive things to manage that funding that deposit based downward. I think in some markets they are watching very carefully what the competition is doing. I think we're going to take a good hard look at – if it's not relationship type deposits, we may treat non-relationships differently than we do relationships.

One of the things that somewhat hurts us when rates are moving up, but does at least for a short-term help us when rates move downwards, and we have always been an active user of wholesale funding. And of course, on the wholesale funding side when rates get moved, and they pretty much get moved immediately, they don't tend to have the drag or the delay that retail deposit sometimes have.

So maybe in the short-term, we will see some benefit from being able to lower that funding base. The key for us and the question mark for us is managing the retail base. We can't afford to lose customers that we worked very, very hard to generate. At the same time, I think the banks understand now especially after last series of meetings that we just can't continue even if some of the competition is, we just can't continue to pay some these rates. It just does not make any sense.

Especially, if we've got other alternatives that are lower funding sources on the wholesale side. So if it means that some of that mix of funding shifts moreover for the time being to a wholesale, that might have to be the case.

Again, number of things to discuss, I don't want to go through all of them on the phone, but they all understand very, very succinctly that this is key. Something on the asset side, and on the loan side, you don't have quite the flexibility there.

We have got to really spend our time and energy on the funding side, and that's what we've primarily discussed yesterday.

Jim Bradshaw - D.A. Davidson

Has all that noise in the bond market changed duration or cash flow that you are seeing spin off from your investment securities portfolio?

Mick Blodnick

No, the investment portfolio has gotten so small these days it's just night and day different, Jim from what it was back in '04 and early '05. Cash flow still continues to spin-off the [CMOs]. We don't see a great deal of extension. This was all -- what's left in that portfolio of investments is basically over half of it is muni's that have been out there. They haven’t bought a muni either for years. So it is all well seasoned muni product and then the other half or the other 45% is pretty much all CMOs that again are well, well seasoned.

And we admit those were -- we felt very, very good as you probably remember from years ago when we talked a lot more about the investment portfolio, about the structure that we were putting in place. Those structures as we've looked back now four or five years, those structures that we purchased, they did just about everything that we expected them to do. They really performed very, very well.

We have seen, of course, in this kind of environment you are naturally going to see some extension. But it hasn’t been anything significant and we still even now with that investment portfolio dropping dramatically over the last four years, we are still seeing any given month, $10 million, $11 million, $12 million in cash flow coming after that.

One of the issues though we have is a lot of -- some of that is collateralizing other funding sources. So one of benefits we had in past years was, we were able to allow that investment portfolio to just decrease, take the cash flow every month and redeploy that cash flow in to higher earning assets or to a point right now at about 15% of assets where that investment portfolio because we don’t want to do anything with the munis and munis themselves represent 8% or 9%. And with the remaining CMO portfolio lot of that is usual, so are munis though. I mean they are used for collateral, and we're getting to points where we've got to maintain appropriate collateral levels for some of our funding.

So we may have to start this year now to step up and actually purchase some more securities. Again that will be very tightly structured on the short end of the majority range, but we may have to buy some more of securities of one type or another to collateralize some of our funding sources with states and municipalities.

Jim Bradshaw - D.A. Davidson

And Mick looks like you got a little bit of excess capital and it’s certainly returning nice capital at this point too. Just wondered is there enough slope in the yield curve or do have enough balance sheet capacity to maybe build that investment portfolio in more than what you need for funding sources or buybacks and boost the dividend. Maybe if you could just sort of talk philosophically about where your priorities are in the capital, on management side, and maybe there is an M&A opportunities that have emerged too?

Mick Blodnick

I think that’s been a major topic for last two or three Board meetings, absolutely. And on that we’ve spent a great deal at time on capital management capital adequacy. I have done a lot of modeling on it. And I guess where we've come up, and this is just again recently at our last couple of meetings is, right now when we model our capital position, stay in the course and really not doing much of anything in 2008 is not the worst of alternatives, believe me. Yes, our capital would continue to grow, ROE would shirk down a little bit, but we would build a fairly significant war chest by the end of '08 and into '09.

And so as all of you know, we are just not going to do anything stupid on the acquisition front. And right now, and maybe I should have talked about that a little bit earlier. One of the things that concerns me about the M&A environment right now is, you've got such a short time and such a short window to do loan due diligence, could you really ever get your arms around a targets asset quality?

I think the last thing that we would ever do or want to do in this environment is buy somebody else's problem loan portfolio. We work so hard to keep ours at the level it is. We're not going to go and buy somebody else's troubles. So that's going to be a issue on the M&A front.

But with that said, Jim, I mean if a great deal came and it was strategic deal, we think we've got the wherewithal to do that right now. And of course we would do it. But again, it's going to have to be somebody that we had a high of confidence in as far as their asset quality.

But maybe even the more important thing is, what are their expectations?. Because if their expectations are the same as they were in early '07 or late '06, well, we won't be wasting our time on anything like that.

Second part of your question is have we looked at stock buybacks? Absolutely. I can tell you it's not on the top of our list. I mean if the stock went way, way, way down, maybe down would change. But based on the modeling we've done, we would prefer to do one or two things. We would prefer to continue to look for strategic acquisitions. Maybe we are wrong here and it wouldn’t be the first time. But if this year turns out to be as troublesome as 2007, and if there is some good banks out there that just decide that they've had enough, we want to be in a position to take advantage of some of those opportunities. And I am not thinking that we are going to do any huge transactions. We kind of like the types of deals we have been doing, which have been definitely smaller, but they have been strategic for us.

One point that came up, and I haven’t heard the question yet, but I am going to probably give you the answer right now and avoid the question is. Our tax situation was a little bit lower this year versus last year, and one of the things that I think contributes to that is the fact that we have got a bigger and bigger presence in Wyoming. Now Wyoming doesn’t have income tax and Wyoming the banks our banks in Wyoming.

Well there is one bank, but we inherited and brought on another bank, and those banks did very, very well for us in 2007. And all of that addition or earnings in Wyoming obviously were not paying a lot of tax on. So that has really helped. And we sure hope that we can allow that franchise in Wyoming to grow even further.

If there are some other strategic acquisitions like that we want to be able to take advantage of them, not just necessarily in Wyoming. Obviously we have said for last year and a half, two years that our strategic focus is up and down but let's slow for the Rockies. Basically from Canada to Mexico and we'll look at good community banks in and up and down the Rockies and the West slope. And I would hope that maybe over the next two to three years, more opportunities will present themselves. I am not really holding my breath but that’s going to happen necessarily in '08 or at least probably not the first half of '08. But things could clear up a little bit in the second half and there maybe some opportunities for us to do something.

On the stock buyback, unless in this industry things could change drastically, I wouldn’t expect that being real high on our list.

Jim Bradshaw - D.A. Davidson

Fantastic. Thanks and congratulations. That was nice to see somebody put up a good chorus since [Sensex] have changed this time.

Mick Blodnick

Thank you Jim

Operator

(Operator Instructions). And at this point, we will take our next question from Ben Crabtree of Stifel Nicolaus. Please go ahead.

Ben Crabtree - Stifel Nicolaus

Thank you. I would like to echo that too, it’s nice to go out of the earnings season on a good note for a change. To follow-on a little bit from of the stuff that Jim was taking about in terms of the acquisitions and tying it in to asset quality. Could you talk about the bulk of the problem credits, the write-offs here being things you acquired. I guess one question would be, when you did the deal did you identify them as, were they high on a fairly high watch list?

Mick Blodnick

Yeah. One of them was not hearing in, one of them - it’s kind of unique situation because it was a credit that was done in between due diligence and in between the acquisition being announced, where after an acquisition is announced, we always have the capability of reviewing credits.

Ben Crabtree - Stifel Nicolaus

Okay.

Mick Blodnick

It just happened to be a weird timing thing. And even there, I think that really would lead to that credit deteriorating further was the individual, the main player got very, very sick.

Ben Crabtree - Stifel Nicolaus

Okay, all right.

Mick Blodnick

And you can't sometimes, that's just going to happen, and you hope it doesn't. But what it did do Ben, is not just so much [debt], but it's just all the things I have been reading and all the things that we've internally been talking about is the due diligence process in an M&A transaction, as you all know is not the greatest. I mean it's not perfect by any stretch.

And you are doing a deal that has to be kept in strict as confidence and secrecy, and yet you would like to maybe go and spend four weeks analyzing every credit you can get your hands on. Instead they give you three days hold up in a motel room often times, or you are trying to make some other excuse as to why you are there.

And that's not the greatest circumstances, and I guess it's probably never going to be any better. I don't know we keep thinking about how can we do it differently, how can we allow ourselves more time, how can we drill down even further to make sure that we are doing things appropriately.

I always think that we've cried to analyze the portfolio, take a conservative view of that portfolio, and then require that we have got the necessary reserves to cover what we think that portfolio contains. And sometimes that's easier than others, and yet at this particular juncture where we are up on the M&A front and with the Aztec quality that’s taken place or the deterioration in this industry, it just tells us that boy, we would really have to be very, very careful right now. And I am not sure again that the process would allow for the level of due diligence that we need to be comfortable with.

Ben Crabtree - Stifel Nicolaus

It's my perception and I didn’t go back and check this of course. But if I would go back over the last six, eight quarters, a pretty high percentage of your charge-offs were not loans that you originated, but loans that you bought. And tell me if I am wrong on that, but it leads to the question of what else do you have in the way of watch list on the banks that you have acquired within the last year. Because if one goes back to your originated portfolio, the losses just going to continue to be exceptionally low.

Mick Blodnick

Right. And again there is one thing that comes to mind, Ben is, every day that goes by we are another day away from those acquisitions. Some of those acquisitions now are two or three years behind us. Did we identify every last problem? Clearly not. Did we identify a whole bunch of them and put in strategies or put in some things to counteract future issues? Yeah, I think we did. We tried our hardest to circle these issues, circle these bad credits and then figure out what was the potential charge-off down the road. Or was there something that had significant collateral attached. Might have some issues with this being a non-performing loan from sometime, but are we going to actually loose any money?

If I look back at the history of this company, our NPAs have been a lot higher than they currently are. You don’t have to go back too many years and we were running 40,50 basis points of NPAs, and yet I look back at those years and still our net charge-offs have always been relatively low, more often than not less than 15 basis points. And I think that all the bank Presidents and the senior credit officers I know vary. They put a lot of pride in the fact that even if a loan does get good NPA status that ultimately we get our money back. And that’s what we have really prided ourselves on.

With some of these acquisitions, I think we did that, I think we tried to say hey this thing may cause us some administrative nightmares, this maybe troublesome but we don’t see a real loss at the end of the day or we do see a loss, and if we do see one, we try to recognize that right off the bat and deal with it.

But again, I guess what I am trying to convey today is, I think the process just isn’t conducive to really getting your arms around loan portfolios like you would maybe need to, and that may in and of itself cause us to step back on even a potential opportunity that would present itself, that we would have to take a – we'll take a good look at it. But we would be looking at it, and in our diligence process probably being much, much tougher than maybe we had done in the past.

Ben Crabtree - Stifel Nicolaus

Okay. A couple of -- I guess this would just be a kind of a simple number question. I wonder if I get a breakdown of the non-performing asset numbers between non-accrual loans and 90 days late, and I guess you show real estate on, but it will make sure I've go the number right there. How do you get to the 13.3?

Mick Blodnick

Ron, you got that?

Ron Copher

Yeah. We are going to be putting that in our press release going forward and in the annual report as well the detail. So the non-accruals at the end of December, $8.5 million past due loans, $2.7, and then the REO category is, call it $2 million flat.

Ben Crabtree - Stifel Nicolaus

Right, okay. And then I guess one of the things. On the call last time, Mick, I think we were just starting to get into the slogging end of the mud here, and you had talked about the competition. We talked a little bit about competition on not deposits, but also on volume, and in particular I think in the real estate space and the non-conforming with Countrywide pulling back out of your market.

So I was just looking for kind of a competitive update both on the deposit side and on the loan pricing, loan volume side from the banks and the non-banks in your territory.

Mick Blodnick

Ben, I think on the deposit side, the competitive nature of that funding, generating that funding has slowed down. I just don't see the level of irrational pricing that was taking place earlier this year and definitely throughout 2006 on the funding side.

Now that's not to say that you don't still have some one-off players out there that you shake your head and wonder what they are doing. But I think the sense I get from our Bank Presidents is, it's not pervasive like it was a lot back. And that’s a good thing. Now, the question we've got to ask ourselves is, how aggressive can we be? Again, we do not want to lose a very good strong customer base that we have built up, and yet we believe there are some strategies and strategic things we can do to minimize that impact and yet still work to lower our funding base out.

I do believe that funding going forward would be a little bit easier to move. Maybe it's because of just the significant changes that have taken place in such a short time. Maybe it's just that loan growth is not as strong as it was over the last couple of years, so the need for funding is not quite there. Maybe it's because the wholesale side has become relatively cheap and it makes it pretty compelling to look at some of the wholesale funding versus paying up for retail funding. It’s a combination of all of those things.

Your second question regarding real estate pricing and competition. I am not sure whether if there is any legislation that's going to go or any regulation that's really going to take place. You keep reading everyday that there is and then there's been people who say no, we don't need that.

The one thing that I have read and I've talked to our people a lot, I think competitively it would make a big difference for us as a bank, as a group of 11 banks is, if the government or if the regulators do anything with the yield spread premium, that would be something that would be, I believe, pretty significant to us. Because, in the past there has been that the mortgage banking industry has always had that and used that to not only attract some of the better originators in that, but again that was something that we never did and we're not about to ever do.

So if they really put some restrictions on that, I think that brings back some volume back to the banks. Because I'd just think it would be just that much more difficult for a lot of mortgage bankers to continue to operate. And that’s been a big part of their revenue stream and I think that would – that will heard and of course that would make the competitive landscape a little bit different for us. Obviously none of us like to see a lot more regulation burden - a regulator burden. I just don’t know if that’s going to come along with it or not, time will tell.

With the confirming loans looking like we're going to see some larger limits there, FHA/VA lending’s been a big part of what a lot of our banks have done for a long time. So that becomes a more viable option, we absolutely will take advantage of that too. So I kind of like on the real estate purchase side and the re-finance side what we have available to us right now, versus what we had a year ago or two years ago.

Ben Crabtree - Stifel Nicolaus

Good, thanks

Mick Blodnick

You bet Ben.

Mick Blodnick

Any other questions?

Operator

No Mr. Blodnick. It appears we have no more questions at this time.

Mick Blodnick

Okay. Well, we will definitely give that information out to all of you at this morning or this afternoon. Again thank you all for taking part with us today, and I guess right now, we all are just hoping that 2008 that things start to settle down a little bit, and we can continue to perform like we hope to be able to do so.

Thank you all very much for your time and support. We will talk to all of you later.

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