Banner Corp (BANR) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Banner Corporation Second Quarter 2008 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS.) As a reminder, this call is being recorded today, Tuesday, July 29, 2008. I would now like to turn the conference over to Mr. Mike Jones. Please go ahead, sir.

Thank you, Patty, and thank you all for listening to our second quarter conference call. First of all, I want to be able to apologize to all of you for the somewhat lateness of our release of earnings, which normally would have been a week earlier than today. However, at the end of June, the FDIC in the State of Washington were conducting their annual examination of our bank and we wanted to make sure that they were done with that examination, which they completed prior to last week, and to be sure that they would not object to our assessments and estimates and provisions that were in the second quarter results. They've completed that examination and therefore we're comfortable in having this conference call with you and releasing our earnings yesterday afternoon.

I actually want to start off and talk about three areas, but before I do that, I need Al Marshall to read a paragraph, if you would please. Al? He's the Secretary of the Corporation.

Good morning. Our presentation today discusses Banner's business outlook and will include forward-looking statements. Those statements include descriptions of management's plans, objectives, or goals for future operations, products, or services, forecasts of financial or other performance measures, and statements about Banner's general outlook for economic and other conditions. We also may make other forward-looking statements in the question and answer period following management's discussion. These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ are available from the earnings press release that was released yesterday and a recently filed Form 10-Q for the quarter ended March 31, 2008. Forward-looking statements are effective only as of the date they are made and Banner assumes no obligation to update information concerning its expectations. Thank you.

Thanks, Albert. I should also mention before I get started that sitting here with me is Lloyd Baker, the Chief Financial Officer of the Company. And Lloyd will have some comments here in a minute. But before we get started, I really kind of wanted to address three major areas in this quarterly earnings release and talk a little bit about those.

The first and probably the most important one is the loan loss provision in the level of nonperforming loans and charge-offs. As you probably were somewhat surprised, we decided to significantly increase our provision for loan losses to the area of approximately $15 million for the quarter. And except for the provision that go -- that's in there, as it relates to the growth that's taken place in other segments of our loan portfolio, except for one-to-four residential and land and lots, all of the additional provision relates to the activities taking forth in that one-to-four construction area and related A&D loans.

The level of charge-offs of $7 million, which is a very high number for us, is, frankly, a way of us being proactive in recognizing the changing in values that were taking place in some of this real estate as we went forward, and we have elected to write down some of these loans as we see these new appraisals at lower levels than they previously were at.

The level of $90 million of nonperforming loans is extraordinarily high for us. But it also almost all relates to the one-to-four construction and related A&D loans that we have in the portfolio. By way of refreshing you people's memory, 80% of our A&D and one-to-four construction portfolio is done west of the Cascades in the Greater Seattle/Puget Sound area and in the Greater Portland, Oregon area. And approximately that's split a little bit, 50/50, maybe slightly larger in the Puget Sound area than it is in the Portland area at the end of June.

However, during that -- and, frankly, the biggest growth that took place in our nonperforming loans in the second quarter was in the Puget Sound area and around -- in and around the Greater Seattle area. And actually, as we look at it much more close geographically, it's the classic case that always happens in real estate of the puddle tends to dry from the edges. And the edges around Greater Seattle are in the areas south of Tacoma in the area going south, down south, towards our state capital, Olympia, but in the Lacey/Thurston County area, over in the area of Puyallup and out into the area of Auburn and that particular area out there. And then going north, you run into an area north of Paine Field, which is where Boeing builds their airplanes, area called Marysville and Arlington, those are the edges of the puddles for us. We don't have a lot in those areas, but whatever we have in that area is troubled. And as a result of that, that's primarily the buildup that's taking place in our nonperforming loans.

We, on the other hand, are feeling much better about how things are going in Portland and Boise as it relates to our portfolios there. The collection activities have been robust and we've actually had some significant successes in collecting a number of those loans in those two markets. We actually think at the end of the day, as it turns out, that the one-to-four construction portfolio in Boise, Idaho will clear up faster than any of the others. But in a way that's to be expected because that's a market we sensed a problem in first and backed away from it some 18 months ago, versus some of the other markets where we continued to go for a few months beyond that. But, nevertheless, Boise is seeming to clear itself up fairly nicely and Portland also is making real progress in those particular areas. Properties are selling and they're selling at a more rapid rate than they were earlier this year.

Another area that I wanted to touch on just briefly is our net interest margin, which at 3.5% for the second quarter can't be characterized as anything but a disappointment for us. We need to have real work done in this particular area to lower our deposit costs and at the same time we're going to have to deemphasize some lending we've been doing on the low yielding loans, usually of very high quality but nevertheless yields that are not going to help our net interest margin. This will be a real area of focus for us on a going-forward basis.

The other thing that we determined and we're -- is that we were clearly more asset sensitive than our modeling led us to believe prior to the rapid decline in interest rates that the Federal Reserve did in the first half of this year. And that has had an impact on having our margin get squeezed downward. And, lastly, of course, as you build up the kind of nonperforming loans that we have that does also have an impact on reducing the net interest margin.

The last major area I'd like to talk about is the elimination of some goodwill. And I need to indicate to you that estimating an impairment of goodwill is, at best, a pretty squishy exercise. We've run a number of analyses of our own. We've actually employed outside experts to help us in this particular area, but at the end of the day you could get estimates from writing off all of the goodwill, which, frankly, would be my preference, and/or on the other side to show that there is not much impairment at all on the goodwill side.

In the end, however we needed to make a decision, and we believe that eliminating some of the goodwill, in this case $50 million, was, and is, a proper thing for us to do. It doesn't affect our liquidity. It has no impact on our capital ratios, and we also remain well capitalized throughout this entire process. But nevertheless we felt that the goodwill, by the technical definition in the accounting literature, was impaired and we determined that a $50 million write-off was the appropriate amount at June 30th.

One last brief comment I'll make and then turn it over to Lloyd is in the area of loan quality. Except for the one-to-four construction portfolio and the related A&D, the quality of the loan portfolio is good. The C&I loan portfolio remains very strong. Our agricultural portfolio, which is now at the height of its growing season, is very good. Our consumer loan portfolio, which includes not only normal consumer loans but second mortgages, also is very good in terms of quality. They all have very low past-due amounts as of June 30th.

So, with that, what I'd like to do is now turn it over to Lloyd to talk about some other areas of our earnings release. So, Lloyd.

Thank you, Mike, and good morning everyone. Mike has really touched on the major themes of this quarter's performance. Obviously, the provisioning and the margin. I'm going to just highlight a couple of items on the income statement and the balance sheet here, and then, as I know Mike does, I will look forward to hearing questions from all of you.

If we turn to the income statement, you can see that net interest income for the quarter was just slightly less than $37 million, nearly unchanged from the prior quarter and really kind of unchanged from a year ago. So, as Mike pointed out, the margin came in, continued to come in, as a result of the drop in loan yields being considerably more than the decline in deposit costs. We continue to be optimistic that going forward we have opportunities to move those deposit costs down throughout the balance of this year. And our expectation is that the Federal Reserve is really done for quite some time, so we'll be able to work on that.

But on a year-to-date basis for the first six months, you can see $74 million worth of net interest income, which is about $4 million more than a year ago. It's important to note, when you look at all of the numbers on the income statement, remember that last year in the second quarter, actually the first of May, we closed two of the three acquisitions that we did last year, the third one closing late in the fourth quarter. And those acquisitions affect all of the income and expense lines to some degree. So the growth in the balance sheet unfortunately being offset to a meaningful degree by the margin compression.

In the area of other operating income -- line that I continue to point out that I think is maybe the most significant measure of success that we're having at the moment, and that's deposit fees and service charges. You can see $5.5 million for the quarter. That's up 34% on a year-over-year basis and up nicely compared to the linked quarter, nearly $500,000 increase compared to the prior quarter. And year-to-date, equally is impressive, an improvement over last year of 49%.

The other major area of non-interest income that we have is our mortgage banking operations. Those operations, on a year-to-date basis, have been essentially unchanged from a year ago but did tend to slow down a little bit in the tail end of the second quarter. And so essentially unchanged from the prior quarter.

In the expense area, I think the line that is important to take a good hard look at is salary and employee benefits. As you all know, it's the major expense that we have as a financial institution other than interest. And at $19.7 million, essentially unchanged from not only the prior quarter but the same quarter a year ago. And, again, I would remind you that that quarter a year ago only had two months worth of the acquisitions that closed in the second quarter and of course nothing from the last acquisition. So expenses, as we've pointed out for a couple of quarters now, tending to flatten out for the most part. A little bit of an increase in occupancy, which is not surprising, given the fact that we continue to open new offices. But some of the other expense lines showing really a very moderate pace of growth or in some cases some contraction.

One exception to that is the line that says payment and card processing. That's up. That's a good expense to have go up. It relates to the growth in deposit fees and the activity there. And while we certainly want to manage that, we -- that's one that we don't object to going up because it's an indication of more transaction account activity.

So, again, sticking with the income statement just for a minute. As we've noted, if you -- if we look at the recurring income at the bottom of the statement, or in this quarter, recurring loss, $2.7 million, and on a year-to-date basis just under $600,000 of net income from recurring operations.

On the balance sheet, just a couple quick things to point out. Loan growth for the quarter was strong at $134 million. It was significantly in -- significantly included growth in commercial real estate and residential real estate, which more than offset some meaningful declines in one-to-four family construction loans and some of the other categories.

And then deposit growth at $63 million, actually somewhat disappointing in terms of the mix of the deposit growth. As we, in this current environment, have seen more activity in certificates of deposit since some declining balances, not necessarily declining accounts, and I -- the reason that I mention fee income on deposit accounts is that when you look at the transaction account balances, they have been declining for a period of time here. And, as we've noted for some time, that's largely a result of declining balance in some of our real estate-related customers. But the number of accounts continues to grow and the transaction fees that those accounts are generating continues to grow.

But the other thing that's happened obviously in the current environment is that we've seen more and more customers moving money into certificates of deposit, and there's been, as you all know, some pretty intense competition from some of the larger institutions, as well as some credit unions who are strong competitors.

Mike mentioned we continue to remain well capitalized. And it's important to note that while equity capital on the balance sheet declined, tangible equity actually increased during the month, or excuse me, during the quarter. And the capital ratios are all well above the well capitalized level at June 30th for both Banner Corporation and each of the subsidiary banks.

We've included a lot of information, more information, this quarter on distribution of loans by geography and type distribution, some detail of the land development loans, some additional detail on the nonperforming loans. I don't think I will get into that right now. I think it would actually be more beneficial if we just see what it is that's on your mind. Before we do that, Mike, you probably have something you want to say that you think I've forgot.

No, I don't. Thanks, Lloyd. I think you did a very good job. Patty, I think at this point we're ready to take the questions from the audience. Thank you.

Thank you, sir. Ladies and gentlemen, at this time we will conduct a question and answer session. (OPERATOR INSTRUCTIONS.) One moment please for our first question. And our first question comes from the line of Jeff Rulis, D.A. Davidson. Please go ahead.

Good morning, guys.

Good morning.

Lloyd, could you tell us the actual total risk-base capital ratio at the holding company and bank levels as of Q2?

Well, as you can see, the Tier 1 leverage ratio is 8.8%, and the total capital, they're 8.8, 9.5, and 10.75. And I'm trying to remember the descriptions of them right now. Total capital to risk weighted assets, though, at 10.75 is probably the most significant. That's the one that we always are closest to the well capitalized level. And just as a reminder, those well capitalized levels are 5, 6, and 10 for those three ratios.

All right. The 10.75 is at the holding company level?

Yes.

Okay. And -- okay. And on the regulatory exams, you completed the exit interview? That's completely finished?

Yes. Well, we, excuse me, there's one final summary, but we've been through all the reviews of all the sections at this point in time with them. (Inaudible) IT compliance and the whole thing.

Okay, great. And, then, outside of the [NTA] impact on margins, it's 16 basis points, which suggests the core margin trends are growing. I guess if you could put any color on what's happening there. Are you catching up to rate cuts or -- and do you expect that to continue?

Well, we're certainly catching up. As you know, the last cut was the end of April, 25 basis points, and that did affect asset yields. But, as I pointed out, really primarily in this third quarter and moving into the fourth quarter, we have some pretty significant opportunities on deposit pricing and we're optimistic that that's going to allow us to ratchet that deposit pricing down. The only caveat is we continue in this rather challenging environment to see some really aggressive pricing out of certain, largely, large banks. But we're optimistic that we should be at the bottom of the asset compression and, more importantly, that deposit costs will continue to move lower.

Great. Thank you.

Thank you. (OPERATOR INSTRUCTIONS.)

Patty, if there is somebody asking a question, they must have their phone on mute.

Give me just one moment, sir, for the next question. And our next question comes from the line of Sara Hasan from McAdams Wright Ragen. Please go ahead.

Hi.

Hi, Sara.

Hi, Sara.

Maybe I missed it, but have you made any announcements on your dividend?

We haven't. We -- actually, as you're well aware, we just paid the dividend in, what was it, the second week of July. And the Board -- the next dividend would be paid in November and the Board will consider that action in September.

Okay. And then, in your press release you talked about not needing additional capital if --

Right.

-- I guess if current price levels hold up and absorption rates remain stable. But I'm just wondering how realistic of an assumption is that and what happens if that doesn't hold up and what are your plans there?

Well, if it didn't hold up, then the dividend would be subject to change.

Okay.

And, roughly speaking, we pay out -- there's about $13 million a year in dividends, $12.5 million or something like that. And on a pretax basis, you could absorb an additional $20 million of losses, if you had to that way. But our analysis really does show that we can remain well capitalized through this entire process, liquidating this portfolio that we have.

Okay.

Sara, we made a point of putting in the announcement that that assessment is based on a lot of very current information.

Okay.

So, obviously, if things turn out to be significantly different in the future, they're different in the future, but based on very current information, we're comfortable with that projection.

Okay.

And, frankly, we're kind of comfortable with it too in the sales activity we've had on some of this real estate of late, which has kind of proved to us the exact levels of values. The fortunate part for us is we don't have a lot on the edge of those puddles, which I think are going to be a troubled area in Puget Sound. And we don't have a lot on the wrong side of Portland and so forth. We're in the better areas of Portland. So we're pretty comfortable with our pricing.

Okay.

Our values.

Let's see, what's in the OREO?

Two -- actually there's more than that. There's some houses that are in there that we've taken in foreclosure, a big chunk of which we've now sold in July, which is kind of what I was just talking about.

Okay.

We have a subdivision that's located in south of Portland in the area called Salem, which is the state capital there, and we're in the process of selling that off. And we've actually sold a small part of it at this point in time. That's the biggest chunk.

Okay.

And then we have a piece of real estate that's located in the Federal Way/Dash Point area, if I can run those to the area in the Seattle area, which we're in the process of selling off also.

Okay. And what is your -- how much do you have in broker deposits at this point? Any?

We do. We have, oh, I'm going to have a hard time here, about $150 million in round numbers, Sara.

Okay.

And that actually -- we had run brokered deposits down earlier, really late last year particularly and earlier this year. And for the quarter, as you can see, we did have loan growth that exceeded deposit growth and we did increase those brokered CDs in an effort to fund some of that. About $50 million net increase.

Okay. And could you talk a little bit more about the sequential increase in the service charges. Was it related to the new branches or is there anything else in there that's unusual?

A lot of it is we've done a much better job of analyzing accounts. And, frankly, some of our business customers have gotten somewhat of a free ride from us in the past. It's a little -- but we're doing a much better job of collecting those charges there. Secondly, throughout our system, we are opening significant amounts of new accounts, and that's not just the new branches but it's also the older more mature branches are doing pretty well in the new accounts. And so it's been across the board in growth. And it's been an area of emphasis for us in the past several quarters.

Okay. Thank you.

Thank you. And our next question comes from the line of Greg Eisen from ICM Asset Management. Please go ahead.

Thanks, good morning.

Good morning.

Mike, you made a comment earlier about the Boise market, that you thought your problem assets would clear in that market faster than west of the Cascades because you pulled back earlier from there. But could you comment about the -- your opinion about the overall state of the Boise market? Is your optimism about the speed at which it clears simply because of when you pulled back, as opposed to the depth of the problems of that market overall?

Yes. I think it has a little bit to do with when we pulled back. Now, having said that, the Boise marketplace, in general, still has significant amounts of in-migration taking place. It has good job creation taking place in the market, very low levels of unemployment, and is an area where the housing costs are lower than they are in other parts of -- as an example, in Portland and Puget Sound. And because of that, the affordability index is much better in that particular marketplace. So, in general, as it relates to houses, I think that marketplace will do pretty well on a go-forward basis. The area of concern would be if you have a whole bunch of land around there. That could be a couple three years before you're going to clear your way out of that.

I see, okay. So, but, in any case, you did your pullback fast enough that you think --

Well, we should of, could of done it six months before that. We'd be in a lot better shape. We did see a lot of buildup taking place in December of '06 and decided to kind of deemphasize that market.

Hindsight sure is 20/20.

Yes, I guess.

Which kind of brings me to the question about new loans. Obviously, as I'm looking at the loan categories in your presentation, most of the construction categories are down versus last quarter. Obviously, like multi-family construction down really half, $38 million to $17.6 million. Commercial construction, though, one item was up versus last quarter. Could you comment on the growth in the commercial construction loan portfolio right now and where you're growing it geographically?

Well, we're growing it inside our footprint and it relates to some efforts that we've made in the commercial construction area. We had some opportunities to have some people join us that we knew from prior lives. And so they came onboard about a year, maybe 15 months ago now, to help us grow that particular portfolio in our footprint.

Now I have to tell you, we did have a reclassification that took place of a hospital credit that moved out of C&I loans into commercial real estate. And that will affect the commercial real estate loans. Not the construction, but the commercial real estate. And it's about $17 million, something like that. So it isn't all that it would appear to be there, but nevertheless that's an area that we've been working on.

The hard part for us is I'm very leery of cap rates on commercial real estate, so I'm not too interested in doing term commercial real estate deals. And that's -- then makes it hard to do the construction. It's -- the conduits essentially are gone from the market today. So if you're not willing to do the term, then it's pretty hard to do the construction.

Right. So is that another way of saying we shouldn't expect to see -- we should not expect to see continued sequential growth in the commercial construction loan category for you through the rest of this year?

You're going to see some modest growth, but it's not going to be like it appeared in the second quarter because of that reclassification of some things.

Okay. Then stepping back from just that one category to the overall construction category, you said, as a group, obviously, at this point in the month we listened to and everyone else on this call has listened to a lot of different banks talk about their loan portfolio and construction and acquisition and development loans as the subject du jour of where every bank's seeing its increase in loss problems. Are you actively, at the same time, are you actively looking to make new construction loan arrangements or are you pulling back from that category and really just -- are new loans just continuation of old commitments at this time?

In general, it's the latter, which is the commitments we're making in the one-to-four area is in for builders that are finishing out subdivisions they have, or building within that area as they get sales. We, as I'm sure all banks have, but we have dramatically cut back the number of unsold starts we allow the builders to have at this point in time. But, in general, if they get into a position to be able to build a house, then we're comfortable in financing them if they're pretty strong financially at the time. We have done in this last quarter a couple of deals, new deals for us, in our portfolio, but it's with very strong builders and very, very selective.

As it relates to commercial real estate construction, particularly in Puget Sound, we're still pretty bullish about that market. I'm just real worried of where cap rates rotate if they go back up to their historic level through retail and some of the other things, office buildings and so forth. So that's why I'm hesitant to say we're going to see a lot of growth because we just aren't willing to do the term loans.

Understood. Understood. Can you share with us, and it may be in the press release schedules, but too many numbers here for me to look at, what your total commitments are that were undispersed, unfunded commitments on construction loans --

Very little.

-- you might have at this time? Very little.

Very little. It's just because there just haven't been that many new houses started. So -- and that's not a very good answer to your question, but it's not anywhere near the level it used to be in the past. What we have is people finishing up homes and selling them, and then as they sell a home we'll let them start another home, if they don't have ten more that they need to sell first. So we just don't have a lot of undispersed commitments at this point in time.

Okay. And one last question, if I may. You mentioned earlier that you found this quarter -- regarding the net interest margin, you were more asset sensitive than you -- I guess you had modeled. I think that was the way you worded it. Was that a function of something that you weren't anticipating in the way you were modeling things or did the market move in ways that it just was impossible for you to predict?

I think it's a little bit us.

You or the market I guess is the question.

The modeling we did was not -- it did not react to how our portfolio reacted when it got the 200 basis point shock in the January/February time frame. And, as a result of that, it was very clear to us we were a whole bunch more asset sensitive than we thought we were. And I -- if it had only been a 50 basis point move maybe it would have been different. Maybe it would have been spot on with our modeling. But that was a shock that I, frankly, have not seen in the past very often, except maybe right around Volcker's period when it came in.

Yes.

But other than that, I hadn't seen it. And so, as a result of that, we thought we were pretty immune to prime rate adjustments based on the size of our portfolio, but it was very clear that we were not. Especially when it happened that fast.

Okay, thanks for answering my questions.

Thank you. And our next question comes from the line of Joe Fenech from Sandler O'Neill. Please go ahead.

Good morning, guys.

Good morning.

Hey, Mike, can you talk to us a little bit more about the focus of the regulators, since you just went through the exam? Were you surprised by anything or did it pretty much go as expected? I guess I'm asking, frankly, would the quarter have looked the way it did in terms of the aggressiveness of some of the actions you took on the credit side if your exam was, say, six months from now instead of right before you reported? Can you talk to us a little bit about the regulatory exam?

Actually, Joe, it was good for us. You never know because you hear these war stories across the country and so forth. And the examination teams came in and there were very few changes in our risk rating of our portfolio. In fact, inside Banner Bank, I think there were only two. And we have an issue with them -- this is probably more than you want to know -- but they have an issue, the FDIC does not recognize a risk- rated 6 asset, which is other loans especially mentioned, which is criticized but not a classified loan. So in their book it either has to be a pass, which the way we count it is a 5, or a 7, which is a substandard. So, other than that, that issue inside of our mortgage subsidiary in Portland, which had a couple other adjustments, the risk ratings were very -- they agreed with us. They were very pleased with the timeliness and quality appraisal work that we'd done. They were impressed and comfortable with our loan administration of how we were working through the collection activity on those loan portfolios. And that whole area went, considering that we've got a lot of nonperforming loans, it went as well as we could have expected.

The examination process is also fairly robust in the compliance area, and that part of the examination also went very well. But that probably is not a big surprise to us because we were told a year ago we were one of two banks in the Northwest to get their exceptional rating they have for compliance. So that went well again at this particular examination.

And, lastly, the big area of emphasis that they have is in the information technology area and so forth, and that part of the exam was also acceptable -- very acceptable to us, and, frankly, didn't have any deficiencies.

As it relates to how it would have changed if that exam had not been when it was, we didn't change any of our numbers that are in here from what -- after they concluded their examination. That was our call, so what we thought we needed to do in the second quarter. So their exam didn't change it. However, I didn't want to put that out only to find out that they had some strong exception to any one of the provision for loan losses or something like that.

Okay, sounds good. And then just one quick question. The dollar amount of credits you'd say were about 6 risk rating. That's the only minor point of dispute I guess?

No.

Is that a big number or is that --?

That's an issue you'll always have with them because they don't -- we have credits risk-rated 6. And they have credits, it's either a 5 or a 7, in our vernacular of what we're talking about. And that was relatively minor. But the two downgrades I'm talking about were real. They took a 4 credit we had and -- or excuse me, a 5 credit we had and made it a 7. So those were real.

Okay, thanks, Mike.

You bet.

Thank you. And our next question comes from the line of Kipling Peterson from Columbia Ventures Corporation. Please go ahead.

Good morning.

Good morning.

First question. Are you able to generalize about what type of haircuts you're seeing on the appraisals that are coming back?

It depends a lot on the market. It really does. We're seeing valuations in south of Seattle -- and you're in Portland, so you know this area -- in the Greater Tacoma area and so forth, having some reasonably large discounts taking place. You take appraisals being done in Seattle or Bellevue or Redmond and there are no haircuts being taken. In fact, many of those properties are still appreciating.

Okay.

It just depends on the area. The edge of the puddle is not where you want to be today.

And does that include Pierce County? Is that a problem?

That's Tacoma, yes. Tacoma and Pierce County.

Okay. And then, when you look at your REOs, how aggressively are you marketing those? Are you hitting bids or are you just being patient or --?

Well, as related to houses, we finally got control of about six houses from a builder, and this happens to be in Boise. And we have a special assets group we've had together for a long period of time. And the lady that manages that area for us put the houses back on the market and I think we actually put them on the market about $10,000 less than where they have been listed before but poorly marketed by the builder. And those homes sold, and are selling, within a period of a week from the time we put them on the market at the price we're asking for. So we aren't taking big discounts on those.

Now, as it relates to the lots, particularly the one in Salem we're talking to you about, we're in the process of selling them out to smaller builders that are just building homes on the particular sites, and so far that's gone very well for us.

Okay. And what do your 30 to 89 day overdue loans look like in relationship to what they looked like in the first quarter?

Lloyd, do you know that number?

[Let me see].

Because it's all in the one-to-four.

Yes. The 30 to 89 is probably down because the over 90 went up. If you look, we do report $96 million in total delinquents, and $89 million in nonperforming loans. So, as Mike pointed out earlier, the delinquency and troubled asset issues that we have are concentrated in that builder/developer portfolio, and the rest of the area, the trends are not deteriorating significantly at all.

Okay. And the last thing, just a comment, I would suggest and appreciate that if, indeed, you decide that you would like to raise some capital to, it appears you don't need to, but just if you wanted to perhaps, get more aggressive, I would hope that you would, at least initially, ponder doing it via a rights offering so that folks that wanted to put capital into the bank could do so without being diluted and even increase their stakes.

Duly noted. We certainly have kicked that around, but we really do believe we have adequate capital where we sit today, unless this gets a whole lot worse than it is.

Great. Thank you.

You bet.

Thank you. And I'm showing that we have no further questions at this time. Please continue with any closing remarks.

Thanks, Patty. Well, thank you all for taking the time to listen to our story. We actually think that real progress was made in the second quarter of this year and we look forward to continued progress and a return to more normal levels of profitability in the third and fourth quarters as we go forward. I'm not going to say that we're going to go back to making $8 million to $10 million a quarter on a go-forward basis, but I think we'll show continued improvement in our profitability on a go-forward basis. And, frankly, the quality of our asset portfolio will begin to show as we work our way through some of these troubled assets. We've got a very good workout loan group that we've had in place for a number of years. They're well schooled in how to do this and they clearly have success when we can finally get some control over some of the properties. So, again, thank you for listening. We look forward to talking to you at the end of the third quarter.

And, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.