Glacier Bancorp Inc (GBCI) 2008 Q3 法說會逐字稿

Good day everyone. Welcome to today's program. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during our question-and-answer session. (OPERATOR INSTRUCTIONS). My name is Katie, and I am standing by if you should need any assistance.

It is now my pleasure to turn the call over to Mick Blodnick.

Thanks Katie. Welcome and thank all of you for joining us this morning. With me this morning, I am calling in from Boise, where I just finished giving a speech this morning. So I am in Boise, Idaho this morning. But with me on the other line is Ron Copher, our Chief Financial Officer, Don Chery, our Chief Administrative Officer, Barry Johnston, our Chief Credit Administrator, and Angela [Dosey], Head of our Accounting department. Last night, we reported earnings for the third quarter of 2008, earnings for the quarter were $12.785 million. This compares to $17.639 million in last year's third quarter. Diluted earnings per share for the quarter were $0.24, compared to $0.33 in the prior year's quarter.

On October 29th, we reported our exposure to Freddie Mac and Fannie Mae Preferred and Common Stock. That exposure was $0.09 aftertax. We never like to take any loss, and honestly, I never thought this would be the type of investment we would lose on. Fortunately we didn't have a large position in the Preferred. Nonetheless, it is regrettable.

In addition to the other than temporary impairment charge, we did have an aftertax gain of $1 million on the sale of our Ketchum, Idaho office. We continue to increase equity within the Company. Tangible stockholder equity into the quarter at 8.11%, versus 7.93% in last year's quarter. Tangible equity increased by $47 million, or 13% in that same time period. As we have been saying all year, our focus is to continue to build our equity position, and in this current operating environment, it definitely seems, it has been the right thing to do, and I am sure we will get more questions about that, as we get into the Q&A session.

Asset quality for the quarter was a mixed bag. As I stated last quarter, we expected nonperforming assets and net charge-offs to increase in the second half of the year. We expected NPAs probably to come in around 1% of assets, but they ended the quarter at 1.3% of assets. Because some of these projects did not have sales that we would have expected, even though they were still servicing the debt, we chose to put these credits on non-accrual, and not have to back out interest at a later date.

Net charge-offs for the quarter were also higher than what we experienced in the first half of the year. Net charge-offs in the quarter were 3.9 million, and that brought the total for the year to 5 million, or 13 basis points. We are still hopeful we can end the year not too far from our long-term goal, which has always been net charge-offs of 15 basis points or less.

On the positive side, we did see further reduction in our 30 to 89 day delinquencies. They have now gone from $45 million at year end to $25 million at September 30th. Our loan loss reserve ended the quarter at 1.67%, up from 1.59% the prior quarter. As we provisioned $8.7 million during the quarter, compared to $5 million the previous quarter, and 1.3 million in the same quarter last year.

We expect asset quality to continue to be a challenge over the next couple of quarters. Hopefully it remains manageable, as it has through the first three quarters of 2008, and we don't experience an extended period of further deterioration in real estate values or activity. Sequentially our net interest margin, and this is something that I have been talking about for three straight quarters, but it finally did take place this quarter, we saw a decrease of 10 basis points in our third quarter margin down to 4.65. That however is still up from 4.5% in last year's third quarter.

Again, the loans that are sitting on non-accrual status would have, in addition to the interest that we backed out on the preferred stock, accounted for 6 of the 10 basis points of compression in the margin. However, as I mentioned last quarter, we did not expect to hold the margin at the lofty level of the second quarter in the first place.

The good news was it held up much better than I expected, and our net interest income did also increase 2% on a linked quarter basis, and our net interest income is up 14% over the same quarter last year. So we really were not very disappointed at all in the performance of the net interest margin, especially when we look at what our expectations were for that margin coming into the year. We have far exceeded those expectations.

Part of the reason for the margin holding up so well, is our funding costs are still having a positive impact on our net interest margin, our banks continue do a good job of managing, as well as our senior staff at the holding company of managing the funding costs. And we are just going to have to see where, obviously with the expectation of lower rates again next week, we will have to continue to evaluate what impact that could have on our margin going forward.

Interest expense again decreased 1% during the quarter, where we gained 1% in interest income. So ultimately that is what led to the 2% change over the prior quarter. Loans grew by $102 million, or 11% annualized in the third quarter. This continues to be higher than our projections, and also through nine months loans have also grown at an 11% annualized clip, and that again, is just higher levels of loan growth than what we were looking for at the beginning of the year.

Because of the seasonality that is built into our loan production, we would expect the fourth quarter and the first quarter should be slower. Where we ultimately end the year out at, it probably is going to be close to about double digits for the calendar year 2008. But we are fully expecting a lower fourth quarter and the first quarter, not just because of the seasonality, but I think also due to the current environment, the current credit environment that is facing the country. And again, we are not immune to that.

Our efficiency ratio increased by 1 basis point to 53%. And this again is if you exclude the OTTI charge, and that is 1% up from the 52% the prior quarter. But it still was a decrease of a couple of percent from the 55% efficiency ratio for the same quarter last year. So the overall trend there is still positive when it comes to efficiency.

The states of the economies we operate in continues to still do reasonably well. Unemployment levels are below the national average, but those unemployment levels are rising in the states that we operate in. It continues to be a difficult operating environment for banks. As we have said many times, we are not totally immune to the many issues facing banks today. However we fully expect that, so far we have been able to navigate through these historic times in pretty darn good shape.

And we hope that we can maintain this same level of performance through the last quarter of the year, then we will have to wait and see what next year holds. Obviously there is a lot of stimulus in the system, there are a lot of things that have got most bankers either totally confused, or at least up in the air, as to what to expect in 2009. But we like where we are at.

I think we are going to continue to aggressively deal with the slightest tinge of asset quality issues, and we are going to make sure that we are absolutely doing the right thing, to adequately provision for any asset quality issues that we see on the horizon. So with that, again we have got the other senior staff members on the phone, and I will open the call up, and be more than happy to take any questions.

Are the phones for questions open, or the lines for questions open?

Yes, they are. We will take our first question from Chris Stulpin. Please go ahead.

Okay. Hi, Chris.

Hi. How are you?

Good.

Good. Hi, Mick, is it possible to get a break out percentage of each loan category that is in your NPA bucket?

Yes. I mean Barry, you have got those numbers, don't you?

Yes, I do. Why don't we go through those, just before we start, there will probably be a lot of questions on asset quality. Maybe I will just preface it with kind of echoing Mick's comments, and maybe get some of those out of the way.

As Mick mentioned at the second quarter, we fully anticipated that NPAs would increase in the third and fourth quarters, along with net charge-offs in relation to those, and that happened. We anticipated that. We noted that in our last conference call. And given the market conditions at that time, it was fairly certain that that is the direction we were heading.

What we didn't anticipate is the real estate sales primarily on lots, developed lots, did not materialize at the level that we had hoped. If anything, the trends went the other way. If it wasn't flat it was down, and generally across the board in all of our market areas, lot sales are down 40 to 60%. We did not fully anticipate that would be the case. We were hoping that things would stay flat, we would have a relatively minor sales season, but nothing to the extent that actually transpired.

So that in essence is what has caused half a dozen projects in our respective market areas not to have little or no sales, and resultingly, we took the very aggressive stance that on a lot of these loans, even though they were contractually current, the borrowers did not have the sales and did not have the apparent secondary support to continue to carry the project, so rather than continuing to accrue interest, we aggressively placed them on non-accrual, got updated valuations supporting the values, and where there were any deficiencies we have taken the loss.

And so that is the background on where the NPAs came from. Primarily the increases came from the Flathead Valley, there is $22 million increase in the Flathead Valley here out at Glacier blank, centered in eight properties, six of which were acquisition and development loans, and two were commercial loans. And those two commercial loans were directly related to the real estate construction industry.

The other increase came about $13 million out of our affiliate, Mountain West Bank. Three credits primarily of a large builder up in the Sandpoint area for $5.4 million, a builder in the Boise area for $5.5 million, and two spec home loans for $2 million each, well actually one is a private residence, the other is a spec home loan to the same individual for $2 million each, in the Sun Valley/Hailey area, and that is pretty much our increase. Other than a small increase in Western Security for $1.4 million on a commercial loan, and one loan in Big Sky Western, one relationship, three small developments, relatively small developments for $4.5 million, and that is where it came from.

It is all in A&D generally across the board, as A&D and it is real estate related, with the exception of three commercial loans. The respective losses that we took during the quarter.

Excuse me. Barry, the three commercial loans totaled about what, it was about about 7.5 million.

7.5 million. That is correct.

And on two of those commercial loans we took an 875,000 in total losses. That made up the bulk of that. We also took a $1.5 million loss on a subdivision southwest of Boise for 1.5 million. And that is the additional $2.5 million increase in the Boise market. Fortunately for the Boise market, we do not have a lot of A&D loans down there, very limited at this point in time. Sometimes it is better to be lucky than good.

Across the rest of the system, we are seeing some difficult times in regards to lot sales. Where we go from here is still uncertain. But if it continues to stay flat as it is, I think we have positioned ourselves fairly well, as far as collateral values, but then again if the market would continue to deteriorate, we would see similar trends in our asset quality. Just to break out, to answer your question specifically a break out of where our NPAs are at, of the 70 some million, OREO is 9.3 million, and of OREO 4.1 is land and lots, and 5.2 million is vertical construction or commercial buildings. A good chunk of that is actually commercial building, or a small portion of that is commercial buildings, but those are vertical buildings. Nonperforming loans, about 62 million, 21.3 million is land and lots. Vertical is 32.3, and Other collateral is 7.6.

Thank you.

We will take our next question from Brett Rabatin. Go ahead.

Good morning Mick.

Hi Brett.

I have got a ton of questions. I will just ask a few. I first wanted to start with, if you mentioned it I didn't hear it, but any thoughts on the TARP, and whether you guys are thinking about getting involved, and if you are, what you would do with the money if you did?

Yes, I mean we would be remiss if we didn't take a good hard look at the program. And of course we, since it was announced, we have been looking at it, not necessarily because we need the capital, like obviously a lot of other banks, but if we can get inexpensive regulatory capital, then we would use it to probably take advantage of a lot of opportunities that we are seeing, and are being presented to us. So, my guess would be that if we do involve ourselves in that program, that would primarily be the reason.

Will you be interested in distress situations, or what is your appetite on getting involved with --?

It would all. That is a great question. It would all depend on where the distress situation are. If it was a distressed situation that is totally outside of our current geographic footprint, boy, we would have to think long and hard. It would have to be very, very compelling.

Yes.

Obviously if it is a distressed situation within our footprint, and maybe something that could be rolled in or folded in to one of our existing franchises, I think we would be, yes we would be very interested, given as you guys know, we are going to maintain the same level of discipline that we have for 15 years. That is the one thing I can guarantee is not going to change. But, yes, we would, we would definitely be interested in looking at something like that.

And then secondly, the loan growth this quarter was a little different than last quarter. And I remember last quarter you had about half of your growth in HELOCs, and I can't tell if you had maybe some of that in this quarter too. Have you been able to go back around since the last time we talked about HELOCs, and analyze that portfolio, and make sure none of the drawdowns were anything out of the ordinary?

Absolutely. In fact, I specifically asked Barry the last two weeks, to talk to each and every one of the banks about that point specifically. And yes, I mean we figure that it wasn't the 46 million of the second quarter, but we still figured that there was between 20 to $22 million in additional HELOCs this quarter. I will let Barry tell you what he heard from all of the banks, regarding the quality of the HELOC portfolio, and where that originations came from.

Yes. It is Brett, right?

Right.

We had loan growth in basically in our one-to-four revolving, quarter-to-date 26.4 million, and I solicit all of the consumer loan department manager, and almost all of the way across the board, it was an increase in originations was the sole driver. I think advanced rates on existing portfolios went up by 1, 1.5%, maybe 2% generically. But it was truly, the volume came from originations. On the side of delinquency, knock on wood, we are still holding on our own, delinquencies are very low. The one outlier is Mountain West Bank, where we have a 1.5% past due percentage there, but the rest of the affiliates have past due percentages less than 0.5%.

Brett, one of the things we are seeing is I think this is what Barry was saying, is rather than, and that is our concern, and that is why we were asking the questions, we want to make sure that all of the growth isn't coming from a higher and higher and higher advanced rate. That was just not the case. But there have been a number of banks in this region that have gotten out of that line of business. We have had these discussions with all of our banks.

HELOC lending is a line of business we like. We have always thought we did it right. We always felt we kept the values very manageable, and at lower levels than maybe even some of the other competition, but now that some of these people are moving out of the space, we are seeing that as an opportunity, obviously it is something you have got to be careful about, but so far, I have been very pleased with the performance of that portfolio, that portfolio is just not at this point in time, showing much in the way of any stress at all.

One thing that we did do earlier in the year, we with have two affiliates that were advancing over 80% on a limited basis to doctors or dentists, or high net worth individuals. And early this year we discontinued that. Nobody is exceeding 80%, and where we have take an automated underwriting or evaluation dollar amount on the home, we have lowered the limit down to 75%. If we obtain a full appraisal, we will go up to 80%. So we have tightened our underwriting there somewhat.

Okay. Then just one last quick one, and I will get out of the way. It looked like there might have been something in the other income bucket maybe out of the ordinary. Was there anything other than noise related to the securities write-downs in the quarter?

Yes. I mean the other issue was immediate, not just, in the securities area, that was on a pretax basis, the $7.6 million.

Right.

We wrote down on the Freddie/Fannie, but then we also did have. Are you talking about expense, or are you talking about on the income side?

The income side. I

The aftertax, the $1 million from the sale of the Ketchum office in Sun Valley. We were approached by the city and some developers, they needed that space that we had to put in a downtown center, and so they built us another branch, that we are going to lease going forward. And we did sell them our existing facility in Sun Valley.

Okay. And maybe I am missing one other thing, but I will follow back up. Thank you.

And we will take our next question from Matthew Clark. Please go ahead.

Hey, guys.

Hi, Matthew.

Can you give us a sense for the construction related loan growth in the quarter? I guess that is embedded in that CRE and resi real estate bucket this quarter, I guess maybe split between commercial and residence related?

Yes, I can do that. Actually, the one-to-four family residential construction loans ended at about 320 million. That is down $62 million from the last quarter.

How much I am sorry?

62.1, which is reflective of primarily a decrease in our Mountain West Bank affiliate, primarily in the Boise market, but also across the system.

Other construction and land development loans went up $86 million. That was comprised of two categories, land development went up $85 million, but development loss which basically are one category went down $18 million, for a net $66.7 million increase in land development, and that is advances on existing loans that we have had in our system for the last two or three years. As we complete a lot of these developments, we are in the latter stages of them, and as you probably are aware, once you get started on these projects you just can't stop. I mean it is not like stop and go, you have all of your infrastructure. You have all of your embedded costs early in the project, and you truly have to finish it up.

We have not originated any new land or development loans in the last year, other than maybe one two minor ones that I can remember, at least at the two, anything above $2million. So those are continued advances on those development loans. The other increase was in consumer land or lot, that is where consumers are actually individuals. You and I are buying a lot to build a house, and we had a $44 million increase there in the quarter. The rest of the categories with the $82 million increase, basically all went down to the net out to the $87 million.

Okay. And then, in terms of I guess ending point for the, I just want to make sure I am looking at some of the same numbers that had previously, but the other construction land development went up $86 million to what?

It went up $86 million total in the quarter.

Oh I am sorry.

It went from 661 to 748.

Got it.

Frankly that surprised me a little bit too.

Okay. Within that, you were talking about the land development piece being up 85 million. How much was that?

Land development went up 85 million.

To what?

It increased 85 million.

Okay.

Land went up 85 million to 312 million.

Okay. Thank you. And then the developed lots, same kind of number?

Developed lots went down 18 million to $83 million.

Okay.

I take that back. It went down 18 million to 64 million, and the--, okay yes.

Okay. Great. All right. And then in terms of the spec construction, I assume that spec one-to-four family, is that 320 really includes the custom and the spec?

Yes, the break out on the 320 is presold which is a builder has a house that is spec, and then he sells it either at, or during construction, that is $25.9 million. Spec is $181.3 million, custom homes, that is owner occupied custom homes is 93.5 million, and then other single family residential, that is individuals, remodels, whatever is $19.4 million.

Okay. Great. And then on the land, just the land, unimproved land, you are not seeing any issues there, I guess they are still carrying?

Unimproved land as it sits is 124 million. And that is up a little bit from quarter end of $112 million.

But in that area, Barry, we haven't seen a significant amount of issues yet, have we?

No. In our unimproved land, it is generally those are the individuals buy land, to either build a future home on, or use as part of their current properties. Almost in all cases loan to values are 50% on that.

No interest reserves are ever built into those loans. The individuals have to have the capacity to pay off the land over a term period, usually five to ten years. We just haven't seen any issues there, all of our issues pretty much across the board are in the A&D portfolio, with the lesser extent now in the spec home loan building, but a lot of that has kind of filtered its way through the system.

Okay. I guess the one component of the construction piece that we may or may not have hit on, is just the commercial construction. Is that outright maybe 200 million?

Commercial construction actually is pretty small. We actually, commercial office buildings, owner, nonowner occupied and other is a total of about $37 million.

Okay.

And then the other component is actually developed lots for operative builders. That is where we have a builder guidance line, we have a builder, and that is $45.9 million.

Great. Okay. Hopefully I have got all of the pieces. Okay. All right.

If you just want to e-mail me, I can give you those numbers.

That is great. Okay. And then in terms of can you talk about any inflows and outflows in non-accrual and OREO, and I guess on a gross basis, what you saw coming in, and what you saw going out?

Just OREO, or NPAs in total?

If you can split it out, that would be great.

Okay. On through the first part of the year, all of our OREO actually just kind of to give you a heads up, is centered primarily in one affiliate bank of the 9.3 million, 6.8 million is centered in Mountain West Bank.

And of that $6.7 million, 6.7 million in Mountain West Bank, 3.2 million is land and lots, and 1.5 million of that is one development in Boise. The rest is mostly builder lots throughout the state. And then 3.6 million is vertical construction, and that is centered almost entirely in spec home loans that we have repossessed.

I would also say most of that is in the Treasure Valley.

Correct.

Okay.

The rest of th OREO, we have three spec home loans for 1.2 million down at Citizens Community Bank, and that pretty much makes, three lots, recreational lots at Big Sky Western for 624. One home in First Security for 339. First Bank Montana was previous bank premises for 286.

And I might also mention to everyone on the line, I am down here in Boise today. I just happened to this morning I was giving a speech to a large group, and before me there was an economist, and clearly they are not out of the woods yet in Boise. I think they are working through the spec construction and some of the vertical construction, but there is a large supply of lots available.

And like Barry said earlier, one of the things that I think Mountain West did an excellent job of, is truly avoiding most of that type of acquisition and development lending down in this market. They just don't have very much at all, and the one that we have already mentioned the one that we did take back down here and wrote down, there is just not much else down here that we have, but there is a lot of other developments out there that are just sitting. So it is going be interesting to see how that dynamic plays out over the next 6 to 12 months here in the Treasure Valley.

Okay. Great. Then I guess maybe lastly, are you able to maybe size up a list of classified assets, or what might be it sounds like your delinquencies were down, but maybe some visibility on classified assets that might come in to the non-accrual?

Right now, classified assets, as everything is trending and have increased over the quarter. We would anticipate that given that the increase in those, and the increase in the NPAs that nothing significant, knock on wood, do we see in the fourth quarter, not to say if this market doesn't take a complete collapse, that we wouldn't see that, but as it stands today, with the amount of NPAs we took on this quarter, we definitely don't anticipate seeing anything of that nature, and the size increase in the fourth quarter. Not to say that if the market stays flat in some of these projects that are, that are having difficulties, if things do not improve some time next year, yes, we would continue to see NPAs increase going through the first and second quarter of next year.

Okay. Great. Thanks.

We will take our next question from Ben Crabtree. Please go ahead.

Yes, hi. Thanks. Just I guess kind of jump around on a couple of things that have already been touched on. I guess maybe relative to the last subject, what are you hearing in terms of, is the end migration really turning down, I mean we are certainly seeing that in some of the Rocky Mountain states, and I am just wondering if in your markets if the end migration is really been cut off, and that kind of situation has become much more of a slower no growth area?

I wouldn't say no growth.

I mean I just saw some slides this morning, Ben, that the economist that was speaking before me showed, and clearly if you take the Boise area, that growth has slowed, but slowed from a very, very high pace, and still the growth is so far above national averages, and I also look at population growth, and expect the population growth that he had over 2007 out to 2012, and the six states that we are in, are still showing far above the national average as far as growth.

Are we growing at the same pace we were back in '04, '05, '06? No, I don't think so, maybe with the exception of Wyoming. Utah continues to be, as far as population growth, Utah still is one of the fastest growers in the nation. Wyoming on a very, very small base though, Wyoming continues to see good population trends as does Montana, but again those don't have, those are off of smaller bases. But, overall, yes, we are not growing at the same pace of a couple of years ago. I think our expectations are that that could even continue to decrease as we move into '09.

I think part of the issue is going to be that as people in California and on the coast, and some of these other markets that have been moving up here, either to retire or relocate, whatever, they are obviously having a difficult time getting any value for their home. And I think that is one of the keys that got some of these people slowing down, rethinking at least for the time being, rethinking their plans. But overall, generally the economies are still better than most other parts of the country. And population trends, again lower, slower, but still pretty good in comparison to the national average.

Okay. Great. Still positive absorption then, in terms of real estate terms?

Yes. And that was kind of interesting too in the Boise market, because I mean the growth is still cooking along pretty well. And they are chipping away at that inventory, and they are absorbing, but it was a pretty significant buildup.

Right.

It is going to still take a while, from what I hear.

One of the interesting at that statistics that we just received, Treasure Valley, they actually had increased home sales in September over August, and that is the first time that has happened in ten years. Now you have a base that was pretty low. I mean given that their home sales were off 20 to 30% in the Valley. That is one positive trend. You can't hang your hat on it, but at least it is positive.

Okay. And then Mick, I guess generally go back and flesh out something you said, you were talking about in response to the question about the TARP capital, that you were talking about the lots of opportunities being presented to you. I know in the past we have talked about, there not being a great big supply of failing banks in your market. Are you finding banks that are just kind of tossing in the towel, or are you seeing more that are really seriously stressed in your markets?

No, we are seeing the former. There are just a lot of people that are tossing in the towel. There are a number of individuals that are just saying, hey I just don't know if, don't know if this I want to keep doing. I mean it is not fun anymore, the regulatory environment is killing us. Again, Ben, as you well know, our space tends to be these smaller privately held community banks. They are facing the same regulatory oversight and burden, and everything that larger banks are, and I think that is a big part of the recent uptick in inquiries.

So yes, I think that and as I have mentioned when Brett brought it up, we don't need the capital and knock on wood, that next year is not going to be something that we would have needed it anyway. We are still growing capital at a pretty descent pace. I am not so sure that necessarily the TARP is our answer either. There are other things we may very well pursue, and hopefully we are in a position to do that.

But we are definitely not going to at least not take a good hard look. I think we would be as I said earlier, remiss if at least we didn't analyze it, and that is what we have been doing that for almost 10 days now.

It strikes me that most acquisitions that you would make, at least if they're similar to your last year, previous ones would be for stock anyway?

Exactly. Exactly. We don't really need the cash.

Right, right. And I guess the other Allied question, is if you had another and I don't know what your amount would be, but if you had another $50 million of capital, could you really leverage it up, given what is going on in your economies, and what I perceive to be a more conservative underwriting stance?

I don't think, no. I mean I think that is a great question. I don't think we could necessarily count on leveraging up with our existing footprint.

That leverage would have to come from other acquisitions, asset purchases, things along that line, branch purchases. Some of those of course if there is an opportunity to buy branches, or things like that, that would be something that we are very, very interested in. If we were going to go the route of more and more acquisitions, and we did get some additional capital, again like this perpetual preferred, then you would have to maybe steer some of these people to a little bit more cash in the deal too.

Right.

Historically we have always had, well it has gone anywhere from 100% I guess down to about, well we have done one deal that was 50/50, or two deals have been 50/50. We may have to push more on that side of it, and utilize this cash that we generated if we decide to go forward.

Last question is, if you have any significant amount of either bank level or holding company debt, that is coming due between now and June, that you might rollover into the guaranteed debt program, if that looks good to you?

We absolutely have. Ron and myself took a good hard look at that. It is another option. We have done that before in the past. We have stepped out during a good, when we were able to get a good deal on a trust preferred, and knowing that we had something else more expensive coming down or coming due, but in this case, it is really not, it is hard to say, but I mean we have got something coming due in '09, but right now, based on those, it doesn't look like it is materially different, especially if you factor in that on the trucks they still are, there is still some tax advantages to them, that the TARP is going to be 5% aftertax.

I was thinking of the guaranteed debt issuance, where the presumption is that banks that issued guaranteed debt would get something much closer to a Treasury rate.

Oh, okay, on that yes, absolutely, because we do know that there are dollars coming due. If we can on a transition like that, where if we can take that lower cost debt, and sure we would look at doing something like that.

I just wondered if you had much coming due?

Yes, there is starting in April of next year.

Okay. Okay. Great. Thanks.

You bet.

Our next question is from Brad Milsaps. Please go ahead.

Hey, good afternoon, Mick.

Hi, Brad.

Just a quick question, maybe more on the margin. Looked like on average you had about $1.1 billion of other borrowed, kind of repurchased money on average during the quarter, and just kind of curious what all was in that bucket? I know you use that Treasury program quite a bit. Just curious what the roll on that stuff is, how liquid that market is right now, and what effect that kind of has on your margin going forward?

Well, I will let Ron comment too, but on, I mean we have been rolling in and out of the discount window, the Federal Home Loan Bank, the BIC program, the TIO program. We have got a couple of broker arrangements with actual brokerage firms, and with us, it has been mostly just where are we getting the best, where are we getting the best funding levels, and it has obviously been something that has helped us out this year, to one of the things that it has been a big plus to our ability to maintain our earnings stream, and yet at any given time, we are not wed to any one of those things.

We have just as of the last 30 days, we have moved money back and forth, from one to the other, depending upon who is giving us the best rate. Now the other thing is that we have a lot of that money short, in expectation that rates were coming down, I guess my expectations we are going see late rates lowered again on at least the futures market is predicting that we are going to see another 50 basis point reduction in rates come Wednesday.

So we are taking advantage of that. Always mindful that, and we did this back in 2004, that at certain times we may choose once we get our interest rate risk models in for the quarter, choose to at some point in time lengthen out a little bit, but right now we truly are keeping most of that money short, because we just in of all the economists we fault, we just can't find too many that are feeling there is going to be a direct switch, and rates are going to start screaming back upward.

Okay. And then maybe a question for Barry, just curious about the provision this quarter. How much of it was specifically related to the loans that went on non-accrual, and just how are you thinking about that going forward?

As we really increased our provision, I think it is in direct regards to what we were seeing earlier in the year, knowing that the market was that soft, and we would be facing increased provisioning.

As noted, we covered our losses by about 2:1, which gives us a pretty good comfort level, that we have been providing to cover anything coming down the road. I would not anticipate that we would back off much from where we have been. I think it is only prudent that we do have a really strong capital base, and more importantly, we have a core earning base that gives us the capacity to do that. So I see us just continuing to increase the provision, especially in addition to any net losses we have.

And hopefully we can take, resolve some of the issues that we have, or at least sell some OREO, liquidate some of these properties that have come online, and then be adequately poised to go into 2009.

I would like to, Barry brought up a great point. That is that we have been very fortunate that we have got the earnings to do some of these things and have some flexibility, but we are ever mindful that we don't know what is going to happen next year. We don't know if we are in a recession, which I suspect we are right now, how deep or long is it going to last. Is that going to start to spill over into other asset categories?

We just want to absolutely be prepared, and that first and foremost, is with a boat load of capital, and secondly with a very, very strong reserve, and we are committed to making sure we have both. So far it has been, this isn't something new that we just started. I mean those are things that we have always ran this company with, a strong capital base, a far and above average capital base, and a strong reserve, and we are just not going to change that.

Yes, Barry is right. I mean I think we have got the resources and everything, and we are going to use those resources to continue to do what is appropriate with the loan loss reserve. Right now, I don't know of a banker in the country, that if they could wouldn't want to have a larger loan loss reserve.

Just to add. Every time we take a nonperformer, or decide to put something on non-accrual, especially a large dollar volume, it is not feasible for your smaller credits, but we go out, we obtain an updated appraisal. Our evaluation if the recent appraisal is there, we insure that we do have supporting collateral based on current market conditions, and then every quarter as we go through our allowance and valuations for it's adequacy, we update the values on that collateral to determine if we have any exposure, we either provide for it, or actually take the loss.

So that is fundamental to our process, we have been doing that from day one. And while we have had some pretty good increases in the provisions, we have been fortunate not to have the actual losses, that may have been the case, had we not maintained some pretty conservative underwriting going in, but we have eaten up a lot of the borrowers equity in the last six months, there is no doubt about it. We are looking at principal dollars now.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS). We will take a few moments for any other questions to queue. And it appears as though we have no further questions.

Okay. Thank you all very much. It is exciting times. But we feel like we sure like where we are at.

We like the position we are in, and we see a lot of opportunities as we look out over the next three to six months, and we have got, we are going to be closing on the Bank of the San Juans at the end of November, and that is going to be a great little addition to this Company. And hopefully, we are going to be able to work on some other things that are looking awful attractive too. So anyway, thank you all very much, and I guess we will talk with all of you later.

This concludes today's teleconference. You may disconnect at any time. Thank you, and have a great day.