Glacier Bancorp Inc (GBCI) 2007 Q4 法說會逐字稿

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.

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 and also a 6% increase over 2006.

Some of our profitability ratios were fairly consistent from prior years. We produced and 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 you know, if you do the comparisons from last year to this year, our ROE has slid 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. The 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 our capital has been building 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 linked quarter basis, our NPAs ended 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 been 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 will be charged off was charged off to the fourth quarter. If there is -- 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 6 basis points in charge-off came from two credits that we had inherited from an acquisition a couple years ago. Tried to nurse those along and finally decided this year to charge those off.

It, 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 debt 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 in the way we analyze credits. I mean all credits of any size go through a multi-tiered approval process. And we've been doing this for many years and it seems to work very well for us. And we have obviously, especially now, have no intentions of changing the way we've been doing things over the last eight, nine years.

So, again, our loan loss reserve ended the year at 1.51%. 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 banks presidents, all 11 of the Banks' 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 through the work that we've 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 to -- 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 assess 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 increases to the net interest margin are probably less likely. So again, we don't project out as to where rates are going. We try to manage the balance sheet in such a way that, again, as many of you know, that it is neutral, that we are protected or we have at least considered rates moving up or down and don't try to make any interest rate bets one way or another.

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

If there is some good news in this, it's 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 though the dollars were lower. We've had a number of accounts that are still, of course, customers of ours 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, the 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 what 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% the 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, low 50s up to that 56, 57 range. We've been able to work that back down. We are 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 is that far from some of the lows. So I think that all of the banks 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 overhead cost, still produce increases in the revenue stream.

Our de novo offices in the past two years continue to gain traction, and that's another reason, I believe, our efficiency ratio has gotten a little bit better is because they're 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 over time.

We are also benefiting, and not all year, but especially towards the end of this past year, I believe we benefited from the completion of the seven bank complete data conversions that we did this year. Bringing 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, I think, helped 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 that 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's no doubt the states and the economies that we operate in, which primarily is 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 a 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 premise 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's going to be some bumps in the road as we move forward. We don't know exactly if we are nearing the bottom for this industry or if we've still got a 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 have done a pretty good job up to this point and I do not expect that to change.

So with that, I think I will open it up for questions.

(OPERATOR INSTRUCTIONS). Matthew Clark, KBW.

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

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 and their pricing structures.

I think that to answer your very first question, we -- 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's a level of competition to try to maintain pricing at adequate levels. And for most of 2007, it wasn't until the fourth quarter where we saw a real drop-off in interest rates, we were able to do that.

Yes, I think we do -- part of that could be the 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. I think one of the reasons that the margin probably did hold up better is maybe not even so much on -- well the yield on earning assets did hold up; you are right. It didn't go down much.

The margin probably held up well because we try 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 -- 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've 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 margins 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. But like I said in my opening remarks, I'm not so sure in this rate environment and with this yield curve that it's prudent to say that that's going to continue. I would suspect we will see some compression.

Okay. And then, can you give us better granularity on the construction book? I think it's about 27, 28% of loans. As it relates to how much of it -- it's 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 your guesstimate of what a spec component or the speculative component might be, and that would be very helpful and maybe how it's migrating.

Yes, we do have -- Matthew, we do have those numbers. I don't have them in front of me. Is that something you would want to just call in later and we could give you those numbers?

Sure. That's great.

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

Okay. Can you maybe just comment then on just your overall -- what you are seeing in terms of risk ratings as it relates to -- if you just were to parse out the resi construction book, for example?

Yes, I would say of the residential construction that we are in two or three markets where -- if residential construction was a big line of business. I think when you are talking about up here in the Flathead, when you are talking 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 may be some things that we're just going to have to work through. But through the end of the year so far, as 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 the last couple weeks. It's looking as though some of that inventory is being worked off. Some of these other areas, of course, never saw that high level of inventory.

I guess on the 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 development loans. I think that, still, a number of these areas have a huge backlog or a significant backlog of lot loans. And there again, with lot loans, it's going to really depend upon who the borrower is, what kind of staying power the borrower has. And again, I think a lot of that is going to depend upon the kind of underwriting that we've done over the last couple years. And even there, we've had some hiccups in the past and oftentimes they're not even related. We're not immune to a death or an accident or something like that that comes up, and we've had some of that happen, which has turned credits upside-down.

We're going to have some credits where if this market continues to extend out and, God forbid, get worse, you are going to have some additional credits that we're going to have to work through.

I do, and I believe Barry would concur with this, we may see NPAs continue to tick up 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 crisis 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, do you have any other comments on that?

No, I think it's -- we've been very fortunate having the markets that we've operated in.

And one of the things that we've also maintained over the last several years during what was a pretty -- considered to be boom years in the real estate market, we were able to maintain our underwriting standards without getting too aggressive. Now, there was always an exception here or there, but generally across the board, we maintained our loans to value ratios and our debt service coverage ratios.

And also, on most of the construction side, we've maintained the criteria that 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, they've been [made book], 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.

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?

Yes, I do. 30 to 89?

Yes.

Well, let's put it this way. 30 to 61 is 0.64%. 60 to 90 is 0.11%. And 90 plus -- 91 plus is 0.26%.

Is that of assets or of loans?

That's of loans.

Okay, thank you.

When I look at total past due loans, Matthew, we are showing 1.01% at the end of year, for total past due loans.

And that's versus (multiple speakers)

Thirty days or greater. That includes the 90 days and greater also.

Okay. Thank you.

And that compares to --

0.80 the quarter before.

Right.

But inter-quarter, it's lower than it was in October and November. So --

Brett Rabatin, FTN.

I'll say congratulations. I haven't gotten to say that too much this quarter, don't like saying it too much, but I'll give you kudos. Obviously, strong earnings in the environment.

I did want to go back to net charge-offs and your elusion to part of them being from that past acquisition. Is that Sanders County and Beaverton County area, Montana, was that --?

It was Sanders County.

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

You bet. On the fourth quarter, there was -- I mean -- and thanks for what you had to say. 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 what the level of 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 plans, 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 as efficient as they possibly can out there.

But I think 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 have been in years past.

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

No, I don't think so. To be quite honest and 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, Brett, was better -- we were projecting 10% loan growth for 2007 and we came in at 11. And really when we even projected 10%, we thought that that was really going to be a -- an omen's task to get that done. It came in a little bit higher. A lot of that 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. I think the snow levels here are probably the most that we've seen in six or seven years. So that's probably having some impact, although I'm 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 yes, 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.

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 would be great.

The one -- I know you pulled back from Boise a 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 are making calls on those numbers, please give me a call too.

We will definitely get that to all of you.

Okay, great. Thanks.

Jim Bradshaw, D.A. Davidson.

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

Well that's a very good question. I mean 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 are facing now. With 125 basis point reduction in nine or 10 days, I think all the bank presidents and their staffs are truly doing some very aggressive things to manage that funding, that deposit base 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 down is, we have always been an active user of wholesale funding. And of course, on the wholesale funding side, when rates get moved, they pretty much get moved immediately. They don't tend to have the drag or the delay that retail deposits 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've worked very, very hard to generate. At the same time, I think the banks understand now, especially after the last series of meetings, that, hey, we just can't continue even if some of the competition is. We just can't continue to pay some of 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 more over for the time being to the wholesale, that might have to be the case.

Again, number of things discussed yesterday. I don't want to go through all of them on the phone, but, they all understand very, very succinctly that this is key.

Sometimes 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 primarily discussed yesterday.

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

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 from the CMO. 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 MUNIs that have been out there; we haven't bought a MUNI either for years. So it's all well-seasoned MUNI product. And then the other is -- the other half or the other 45% is pretty much all CMOs that, again, are well, well seasoned. And 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. I mean they really performed very, very well. We have seen, of course, in this kind of rate 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're still seeing any given month, 10, 11, $12 million in cash flow coming off of that.

One of the issues though we have is a lot of -- some of that is collateralizing other funding sources. So one of the things that we -- one of the 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 into higher earning assets.

We are 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 the MUNIs themselves represent 8 or 9% and with the remaining CMO portfolio, a lot of that is used -- well so are the 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, they will be very tightly structured on the low, on the short end of the maturity range, but we may have to buy some more securities of one type or another to collateralize some of our funding sources with state and municipalities.

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

I think that was -- that's been a major topic the last two or three, four meetings. Absolutely. And we have spent a great deal of time on capital management, capital adequacy. We've done a lot of modeling. And I guess where we've come up, and this is just again, recently at our last meetings, last couple meetings, is right now, when we model our capital position, staying 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 shrink down a little bit. But we would build a fairly significant work chest by the end of '08 and into '09. 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 target's 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 -- problem loan portfolio. We've worked 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 an issue on the M&A front.

So, but with that said, Jim, if a great deal came and it was a 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 level of confidence in as far as their asset quality. But maybe even a 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.

The second part of your question is, have we looked at stock buybacks? Absolutely. I can just tell you it's not on the top of our list. If the stock went way, way, way down, maybe that would change. But based on the modeling we've done, we would prefer to do one of two things.

We would prefer to continue to look for strategic acquisitions. We -- 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'm not thinking that we're going to do any huge transactions. I think we kind of like the types of deals we've been doing, which have been definitely smaller, but they've been strategic for us.

One point that came up -- I haven't heard the question yet, but I'm going to -- I'll 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, our banks in Wyoming, well there's 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 additional earnings in Wyoming, obviously, we're 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 the last year and a half, two years that our strategic focus is up and down the west slope of the Rockies, basically from Canada to Mexico. And we will 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 or three years, more opportunities would present themselves. Not really holding my breath that that's going to happen necessarily in '08 or at least probably not the first half of 2008. But things could clear up a little bit the second half and there may be some opportunities for us to do something.

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

Fantastic. Thanks and congratulations. That was nice to see somebody put up a good quarter for a change this time.

Thank you, Jim.

(OPERATOR INSTRUCTIONS). 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. The follow-on a little bit from some of the stuff that Jim was talking about in terms of the acquisitions and in tying it into asset quality. You talked about the bulk of the problem credits or write-offs here being things you've acquired. I guess one question would be when you did the deals, did you identify them as -- were they high on -- on a fairly high watchlist?

Yes, one of them was. One of them was not. Here again, one of them -- it was kind of a 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. It just happened to be a weird timing thing.

And even there, I think that really what led to that credit deteriorating further was the individual, the main player got very, very sick. 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 that, but it's just all the things I've been reading and all the things that we have internally been talking about is the due diligence process in an M&A transaction, as you all know, is not the greatest. It's not perfect by any stretch. You are doing a deal that has to be kept in strictest 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 hotel room, oftentimes, or you are trying to make some other excuse as to why you're 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 tried to analyze the portfolio, take a conservative view of that portfolio and then require that we've 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 at on the M&A front, and with the asset quality that is taking 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'm not sure, again, that the process would allow for the level of due diligence that we would need to be comfortable with.

And it's my perception, and I didn't go back and check this, of course, but if I were 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'm wrong on that, but it leads to the question of what else do you have in the way of watchlist on banks that you've acquired within the last year? Because if one goes back to your originated portfolio, the losses just continue to be exceptionally low.

Right. And again, I think there's -- one thing that comes to mind, Ben, is every day that goes by we're another day away from those acquisitions. I mean 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? Yes, I think we did. I think 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 this something that had significant collateral attached? Might have some issues with this being a non-performing loan for some time, but are we going to actually lose any money?

If I look back at the history of this Company, our NPAs have been -- well they've 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, I mean more often than not, less than 15 basis points.

And I think that all the bank presidents and the senior credit officers -- I know Barry -- they put a lot of pride in the fact that even if a loan does go to NPA status, that ultimately, we get our money back. And that's what we've really prided ourselves on. And 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 may be 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'm trying to convey today is I just -- 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 we will present itself that we would have to take a -- we would take a good look at it, but we would be looking at it and in our due diligence process, probably being much, much tougher than maybe we had done in the past.

Okay. A couple of -- I guess this would just be kind of a simple number question. I wonder if I can get a breakdown of the non-performing asset numbers between non-accrual loans and 90 days late. And I guess you show real estate owned, want to make sure I've got the number right there; how do you get to the 13.3?

Ron, you have that?

Yes. And we are going to be putting that in our press release going forward and the annual report as well -- the details. So the non-accruals at the end of December, $8.5 million. Past due loans, 2.7. And then the REO category is, cal it 2 million flat.

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

Ben, I think that on the deposit side, the competitive nature of that funding or generating that funding has slowed down. I mean I just don't see -- I don't see the level of irrational pricing that was taking place earlier this year, 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're doing.

But I think -- the sense I get from our bank presidents is it's not pervasive like it was a while back. And that's a good thing.

Now, I think the question that 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've 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 down. I do believe that funding going forward will 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 the last couple 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. I think it's a combination of all of those things.

Your second question regarding real estate pricing and competition, I'm not sure where, if there's any legislation that's going to go or any regulation that's really going to take place. You keep reading every day that there is and then there's people that say no, it doesn't -- we don't need [in] that.

The one thing that I've read and I've talked to our people a lot that I think competitively 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 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 that -- because I 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 would hurt. 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 or regulatory burden. I just don't know if that's going to come along with it or not. Time will tell.

With the conforming loans looking like we're going to see some larger limits there. FHA VA lending has 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 refinance side, what we have available to us right now versus what we had a year ago or two years ago.

Good, thanks.

Any more questions?

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

Okay, well, we will definitely get that information out to all of you yet this morning or this afternoon.

Again, thank you all for taking part in this today. And I guess right now we're all 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. So thank you all very much for your time and support and we will talk to all of you later.