Glacier Bancorp Inc (GBCI) 2008 Q4 法說會逐字稿

It is now my pleasure to hand off the conference to your moderator, Tim Blodnick. Please go ahead, sir.

Thank you and welcome all of you and thanks for joining us this morning. With me this morning is Ron Copher, our Chief Financial Officer; Don Chery, our Chief Administrative Officer; [Barry Johnston], our Chief Credit Administrator.

Last night we reported earnings for the fourth quarter and the full year of 2008. Earnings for the quarter were $17.014 million this compares to $18.146 million in last year's quarter, which is a decrease of $1.132 million or 6%. On a diluted earnings per share basis for the quarter we produced $0.29. This compares to $0.34 in the prior year's quarter. Once again a decrease of 15% as the share count increased during the quarter primarily due to the capital raised and of course also the 640,000 shares that we issued in the Bank of the San Juans transaction. We have really not had much time yet to deploy or leverage the capital into higher yielding assets at this time.

Earnings for the year were $65.657 million versus $68.603 million for 2007. Once again a decrease of $2.946 million or 4% for the year. Diluted earnings per share for the year were $1.19; that is down from $1.28 last year or a decrease of 7%. Our return on average assets for the quarter was still a respectable 1.27% and return on average equity of 11.02%, which considering the level of capital we have in the Company was not too bad. For the year our return on average assets was 1.31% and our return on average equity was 11.63%, which both include the $4.6 million after-tax OTTI charge we took on the Freddie Mac preferred and the Fannie Mae common stock in the third quarter.

We really felt our profitability ratios held up well during the year 2008.

The quarterly earnings numbers were straight forward, absent any nonrecurring income or expense items. It's always preferable for us to report core operating earnings and net earnings that are kind of one and the same and don't have a lot of noise attached to them. And that is the way the fourth quarter was for us. It was just not a lot of noise in the numbers.

Although our earnings for the quarter and year were not what we had hoped for, there was some underlying strength in our performance. Our pretax, pre-provision earnings for the fourth quarter increased 26% over the same quarter last year, and for the full year 2008 were up 16%. So we felt that there was good core earnings momentum generated throughout the year and especially in the last quarter.

Total assets for the year grew 15%, which exceeded our expectations. Part of the reason for the higher asset growth was the additional investments purchased during the year and, of course, the acquisition of Bank of the San Juans. However, excluding the acquisition, organic loan growth last year was also a very strong 10% increase.

Deposit growth, on the other hand, was flat as we refused to compete with the irrational pricing we were witnessing in many of our markets. We are hopeful that some of that sanity returns to deposit pricing this coming year, and we are beginning to see that some depositors are searching out a safe haven rather than always looking for the highest rate.

Now one positive trend that we experienced last year was the number -- and this has always been a main focus of the Company and all of our banks, and that is growing checking accounts. Although the dollar of checking accounts in DDAs and NOW accounts has been under a lot of stress and strain over the last two years, we have consistently been able to add more and more net accounts each year. This past year in 2008, once again, our total number of new business and personal checking accounts increased by 9%.

So if nothing else, even if there is still more pressure put on the dollar amounts in these accounts, it is an opportunity for us to -- with these additional relationships to establish more fee income and, hopefully, other products and services can be sold.

During the quarter we did close the transaction with Bank of San Juans located in Durango, Colorado. This marked the initial entry into the State of Colorado. We are thrilled to have added such a quality institution with a very talented group of bankers to our family of banks. We expect some very positive things in the future from Bank of San Juans.

Another highlight of the quarter was the successful common equity rates we completed in November. We felt very fortunate in this very difficult environment to have such a positive investor response to our equity offering. With $94 million in net proceeds in addition to what was already very strong capital levels, GBCI is now in good position to take advantage of future opportunities as they present themselves.

Every capital ratio improved during the quarter and year. Tangible common equity ended the quarter at 9.59% versus 8.03% in last year's fourth quarter. Tangible common equity increased by $143 million or 38% during 2008. We continue to believe that tangible common equity is the highest form of capital and the current amount of tangible common equity should serve us well during these difficult times.

In addition, all regulatory capital levels are also at or near all-time highs. At year-end our Tier 1 ratio stood at 14.2% and our risk-based capital ratio was 15.46%. And that actually includes adding Durango, which somewhat brought that ratio down. Prior to Durango it was well above 16%. So in this current operating environment maintaining equity and capital ratios at high levels we believe is the right thing to do.

Asset quality continues to be the number one challenge facing banks today, and in that respect, we are no exception. NPAs increased in the fourth quarter by $13.7 million to $84.5 million or 1.46% of assets. This compares to 1.30% the prior quarter and 0.27% a year ago, so you can see where that ratio has gone in the last 12 months.

Net charge-offs. We ended the year at 21 basis points, although the last two quarters were running at about a 40 basis point annualized rate. Even though we didn't achieve our long-term goal last year of keeping NCOs at or under 15 basis points, we still felt it was a very respectable performance from a net charge-off perspective.

Our ALLL ended the year at 1.86% versus 1.67% last quarter and 1.51% at the end of 2007. We provisioned $12.2 million to the ALLL in the fourth quarter and that compared to $3 million in the same quarter last year. In addition, we felt good that we covered our net charge-offs for the quarter 3.3 times. For the year we added $28.5 million to the reserve and that amount also covered the net charge-offs of $8.8 million by over three times.

Our coverage ratio was about unchanged from the prior quarter, but well below last year's coverage ratio where this year we ended the quarter at right around 91%, 92% and the ratio lashed year was a little over 400%.

We did see our 30 to 89-day delinquencies increase from the prior quarter and ended the year at $54.8 million, an increase of $29 million for the quarter and $9.3 million from last year's fourth quarter. Clearly there are still credit issues that will continue to need our full attention in order to keep the delinquencies and the non-performing assets at manageable levels. We expect credit quality to continue to be a challenge and are not expecting any turnaround in the near term and maybe not at all this coming year. So all of our banks are going to have to continue to be diligent in working through these credits, maintaining adequate reserves for their problem loans.

One area that was a bright spot for us all year has been the net interest margin. Sequentially, our net interest margin increased 16 basis points in the fourth quarter to 4.81% and is up 29 basis points from 4.52% in last year's quarter. Loans added to non-accrual status during this last quarter cost us three basis points in net interest margin.

Our expectations going into the year was for a lower margin of around 4.25% to 4.30%. Instead our net interest margin averaged 4.70% during 2008. I don't expect much further expansion in the margin as I think our funding costs can't go much lower, but hopefully we can maintain at or around this current level for the next couple of quarters at least and hopefully not suffer any significant contraction in the margin.

I felt the banks did a great job throughout the year of managing and expanding their margins. They protected the yields on their earning assets and were proactive in adjusting lower rate -- or adjusting to lower interest rates on the funding side.

During the quarter our net interest income was up a very healthy 8.5% as interest income increased only 1% -- and yet in this environment just that 1% increase I thought was an [omen's job] -- and interest expense decreased by 16%. During the year we saw even more dramatic differences as interest income was down only 0.6%, while interest expense was down 25.5%. Although, again, we would not expect to see much further reduction in interest expense as we move into 2009, we are also not looking for any increase anytime soon.

Another real bright spot was our efficiency ratio. The efficiency ratio decreased to 49% from 53% the prior quarter, and that 49% was a fourth-quarter number. For the year our efficiency ratio came in at 52% compared to 56% last year. This was another very positive trend during the quarter and the year as the Company did a good job of controlling costs. Although increase revenues, especially net interest income, played a big part in improving efficiency, I thought the 11 banks did a stellar job of controlling their expenses.

Non-interest income was $600,000 or 3.7% lower in the fourth quarter compared to the previous year's quarter. However, excluding all of the nonrecurring gains and charges, non-interest income increased $3.5 million during the year. I think that was another a very positive trend is even though the industry struggled from production and a fee income perspective, our fee income actually -- excluding all of the items we felt very good that we were able to actually show that type of an increase during 2008.

I guess in closing, by now you have all heard hundreds of times how bad the economy and the struggles our industry is going through, and there is no argument that these are tough times. So far, however, we have navigated through this turbulence about as well as we could ever hope for. Although we did not achieve the level of performance we planned, we can't help but be happy with the strides that we did make this past year.

I have said it countless times; we have 1,700 smart, hard-working bankers and directors that give their all for the continued success of GBCI and are very proud of what they have accomplished. We don't expect it to get any easier anytime soon, but we are committed to keep grinding and persevere until this thing starts to improve.

I guess those are basically my comments. I will turn it back over to the moderator and we will be happy to take questions.

(Operator Instructions) Joe Gladue.

Okay. I was just hoping you could give me a little color on, I guess, the 30- to 89-day delinquencies. Is that spread among a whole lot of smaller credits or were there a few large credits? And maybe you could just give us sort of what industries or types of loans they are?

Sure. I will let -- Joe, I will lead Barry, our Chief Credit Administrator, answer that question for you. He has got all of the data.

Good morning, Joe. As far as the industries go, I think it's just a given it's those credits that are secured by land, land development, developed lots. Primarily as far as the size of credits, I think the largest credit in that category is about $6 million. But it is spread out among the affiliates.

Of course, the higher concentration is in the larger banks -- Glacier Bancorp Kalispell, Mountain West Bank -- and to a certain extent in the real estate market down in Big Sky Western and Bozeman, Montana. But it is truly all real estate-related past dues.

I guess I was going to ask pretty much the same question about the increases you saw in non-performing loans for the quarter, where that stuff is occurring?

For the quarter it was about a $12 million increase and it was in five relationships; three spread out through the system, Idaho and -- primarily Idaho and western Montana, and then one down in Wyoming and one in Utah.

Actually it was all four states.

All four states and five different relationships; two of them were $4 million each and there were two smaller ones at $2 million each. Again, in all cases it was plotted developments, final plotted developments.

Thank you. That is helpful. Just one bookkeeping question, how much was the acquired reserve you got from Bank of the San Juans?

$2.6 million.

Okay. I think I will step back and let somebody else ask some questions.

Ben Crabtree.

Good morning. What was -- I don't know if you can identify it, but in general, what is the impact of Bank of San Juan on the margin?

Not much. The margin that we ended the -- Ben, the margin that we ended the year with was very close to where their margin is. Their margin had been over 5%. But they are pretty asset-sensitive and they have seen some reduction in that margin to where I think -- the numbers I saw in December it was about one right on top of the other. So we didn't benefit or we didn't lose by bringing their margin on.

I should know this, but is their earning asset mix more skewed towards investments than yours is?

No. No, not at all. They had none.

Okay. So the margin trend during the quarter was it fairly stable?

The margin trend during -- month over month? Yes, it really was.

Okay.

We didn't see a lot of deviation. We got a nice little kick right away in October and then that maintained itself pretty well. Within any given month, based on the way the margin is calculated, Ben, if you have got a month like November where there is less days that has available bit of skewing impact.

But, no, I would say that for the three months during the quarter it was pretty consistent. But consistent at a rate that was surprising to us, a little bit higher than what we had expected.

Do you have -- I guess the question -- what percentage of your loans do you have floors on? And has that changed much over the last -- during the last year?

Yes, it has continually increased. We are just above -- of all of our floating-rate loans we are just a tad above 50% now. In fact it's getting closer to 60% that have floors; so I looked at those numbers here just in the last couple of weeks. We were a little bit below 50% last year, so we made some definite gains there.

And there is just no doubt, Ben, that all of the banks if they are doing that kind of lending in this environment more likely than not those floating-rate loans are starting out with a floor. Barry, you got anything to it today?

No. Anything coming on the books now -- I think we got a little away from it when rates were up and around 9%, but as rates started moving down anything that came up for renewal we are initiating a floor anywhere between 5% and 6%.

Mick, I was struck by your comment about the irrational deposit pricing. I guess I thought maybe that was in my territory, confined to Chicago, but apparently not. You said in several of your markets -- has that tended to come more from the smaller banks and what do you think is maybe driving them behaving a little better real lately?

I think it has primarily been coming from the credit unions, I mean what we see. Although, it seems to me that when -- if you are operating within a market where the credit unions are paying rates that are far beyond market rates today that you are also going to see some smaller community banks that try to compete against that. And we just chose not to and I still believe it was the right thing to do.

I don't believe we lost -- if it was a relationship customer, we were willing to do whatever -- and all of the banks did this. I am 100% confident that any relationship-type customers we were not going to allow them to -- lose them. But if it was a one-off customer that had -- was looking for the highest rate and maybe we had that CD or that money market before, we have made those changes and we have been willing to let those dollars leave the bank.

Obviously, right now we are replacing them with more likely wholesale deposits. But it's just for us the insanity of paying 4% for a one-year CD when we could borrow money at 25 basis points to 50 basis points just makes no sense.

Have you taken advantage of the government's guaranteed debt issuance program?

We have signed up for it, but at this point, Ben, we have done nothing.

I guess a final point in that and it is somewhat tied into what you just said, I guess given how good all of the rest of your numbers were I was a little surprised by the non-interest-bearing deposit number. They looked pretty sluggish to me and I am just wondering what is going on there? If it's something external, if you think you could turn it around or what?

Like I mentioned, the last two years we have increased the number of checking accounts by 9%. That is the number of customers and yet the pressure has been on the dollars. Now clearly we do not have -- although this last three or four weeks I am expecting -- I don't have the numbers yet -- but I am expecting there is going to be some spike up in balances as some of the title companies and that work through this refinance wave.

But we have got a lot of title companies that we had and continue to have for many, many years. We have monitored those balances and those balances are far below where they were two or three years ago. I think you couple that with just the overall economy and how tight things are with businesses and individuals. And even though we had two years of really good growth in the number of accounts and the number of relationships, the average balance has just continued to come under pressure.

I will get off and let somebody else ask questions.

Chris Stulpin.

Mick, can you update us or characterize what changes you have seen in the last quarter in the five markets in which you operate, five states?

Well, I think that -- I guess my first general characterization would be that just like the rest of the country you are definitely seeing a slowdown. I mean I still really am -- believe me I am thankful everyday that we are operating in these states versus a lot of others. But that still has not made these states immune from layoffs, from the slowdown in the general economy with virtually no volume on the sale of real estate, whether it's vertical or horizontal.

I like -- I don't like the unemployment rates because they are double what they were maybe two years ago, but this part of the country had absolutely some of the lowest unemployment rates of anywhere in the nation. And they are still the lowest, some of the lowest levels in the nation.

I guess another positive we are seeing in Wyoming and Montana is we are just not seeing the value of real estate in some of our markets that has taken much of a hit. In fact, just last week there was a survey conducted by the National Realtors Association that showed some of the markets in Montana where we have got some pretty decent-sized presence like Billings, like Missoula, that haven't seen anywhere near the drop-off in values that may be the Flathead Valley has or Boise has. We have got to still feel pretty good and pretty fortunate that the five states that we are operating in are still doing pretty well.

The newest addition, Durango, I think that market has definitely slowed down from a volume perspective. But values have still held up very well down there and that economy is still doing very well. So we are excited about that entry into Colorado. We are excited about the individuals that have joined the Company down there. We think we have got a great staff and Board of Directors, and we think that is going to be a very good deal for us.

But even there, just like Wyoming and Montana, Idaho, Utah, I think we have all seen some slowdown. There is just no doubt about it and I believe, Chris, that 2009, like I said in my comments, I just don't know if it's going to get a whole bunch better.

Can you touch on what you are seeing in CRE, C&I, and your home equity lines of credit? What is happening there, please, Mick?

Well, on the home equities we continue to monitor them very, very carefully. I know Barry is constantly in contact with each of the Bank's chief credit officers. And as you would expect, in an economy like that you are going to start to see some delinquencies. We have seen some, but so far that is not something that has been rampant at all, not even close.

The home equity portfolio continues to hold up very well. I will probably let Barry comment on what he has seen out there on the termed out commercial real estate and the C&I portfolio.

Actually, on our term commercial we haven't really seen anything that is giving us concern at this point. Not to say that there won't be some domino effect, because most of our -- over 60% of our term commercial is owner-occupied stuff. Those are the mom and pops in our local businesses that provide services and product primarily to all of our markets, but so far we have been fortunate. It's one of the positive points.

On the C&I portfolio, again, same thing. Nothing of major consequence there. No huge losses last year that came out of the C&I portfolio except for one credit in the Flathead Valley. So we are feeling fortunate there also. But not to say that going forward, given this economy, that we won't have some challenges down the road.

One addition to Barry's comments -- and I don't see even nationally where this has become a major problem. But of course, I mean we all know about the level of foreclosures that are taking place. But our one to four-family real estate portfolio is truly a legacy -- I think I have mentioned this before -- it truly is a legacy portfolio. Because it has been over 10 years since we have really had portfolio much in the way of one to four-family real estate loans.

Most of that production has always been sold into the secondary market. And, again, we primarily for the most part have always been just an A lender. So what is on the books -- and it's still about 18% of the portfolio -- are one- to four-family loans that, for the most part -- obviously there is an exception here or there -- but the bulk of that portfolio is loans that were inherited prior to the Western Fed acquisition in 2001, which of course was the largest thrift in the state of Montana. So we have just -- knock on wood -- we have been pretty fortunate there too. We just haven't seen much stress at all in that portfolio.

Fantastic. Thank you very much.

(Operator Instructions) Matthew Clark.

I guess first just on the borrowing side, it looks like you paid down some higher cost borrowings. Can you -- you mentioned doing some stuff at 25 basis points, 50 basis points, but can you discuss I guess in more detail the specific type of borrowings you might be interested in here and your strategy I guess going forward? I guess there is no real expectation for rates to go up, but I assume you are thinking about that scenario too.

Absolutely, Matthew. I think we mentioned last quarter we are constantly looking at the lowest cost wholesale funding base. Obviously, on the true deposit side of the balance sheet all of our focus at the Banks is spent almost entirely generating checking accounts. But on the wholesale funding, which is where we picked up most of the additional funding, it could be that discount window. It could be the Federal Home Loan Bank. It could be some of the Treasury facilities -- [tapp], TIO -- and the TIO obviously right now the government is not doing anything in that particular venue. But we are constantly looking for where we can get the best deal.

Now one thing -- and I think in a roundabout way you are asking this is what are we doing? We have been very fortunate -- and I wouldn't say that this was necessarily just a stroke of luck, because I think we really thought based a year or two ago that we saw some real issues and we felt that rates would be coming down. Never thought they would come down as far and as hard as they did in such a short period of time. But we did want to keep a lot of that funding short and of course that has been a very, very good thing for us.

But in the last couple of months of the quarter we did take some opportunities to move some money out onto the maturity curve and we are going to continue to look for those opportunities. Most of it is relatively short right now; less than 90 days. But we moved a pretty decent amount of money out seven years in the fourth quarter and we may do some more of that.

But it's just like you said, Matthew, right now as I read the tea leaves I just don't see rates doing anything much in the near term at all and maybe not at all this year. In fact, most of the economists we follow tend to say the same thing that these rates are going to stay pretty tightly range bound over the next 12 months.

Okay, great. I guess another question, how confident -- can you walk us through the compensation structure? Or how you -- I guess what gives you confidence that your affiliates are alerting you of potential problems and bringing them to your attention and you guys are addressing, marking, moving the problem along?

I guess how confident are you that those problems are brought to the table to the Chief Credit Officers at each of the banks and they are being forthright with you as well?

I will let Barry go into more detail because I think that is a great question and we get it from time to time. I think it starts with the system that we have set up. And I am not going to spend time going through the system because that would take far too long, but I really think that what we have developed here over the last 10 years knowing that we run this decentralized model and knowing that there is always the risk of having some maverick or somebody out there doing something goofy, we just can't afford that.

I think that, here again, every one of the banks this last year went through a full safety and soundness exam. We had anywhere from 10 to 15 examiners in each of those banks for two weeks, so that gives us some comfort. We have comfort knowing that we have got an outside consulting firm that has spent a week in every one of our banks going through a random group of loans and relationships. And then, of course, I think Barry is out in those banks throughout the year.

And of course every Wednesday at 10 o'clock we have every one of the Chief Credit Officers at a meeting that lasts anywhere from one to two hours every Wednesday where they are going through any issues they have whatsoever -- classified, criticized assets, delinquencies, collections. So I think we feel -- I mean there are problems out there. Don't get me wrong. We are not immune, like I said earlier, to the same issues and the same economy that everyone else is. But I feel pretty good that there is not things that are being hidden out there that we are not aware of. But I will let Barry comment.

Just to kind of echo Mick's comments, one thing that we really feel comfortable about especially given the regulatory environments that we had of our four largest banks, we had the regulatory examination cycle at the very end of the year. It was in October and November; actually we just received the examination reports on some of those things this past week. So that gave us a pretty good comfort level, especially in regards to identifying loss and non-accrual status of loans.

So the timing on that is perfect for us. That happens every year, the FDIC, the Federal Reserve, and the state of Montana, state of Wyoming, state of Idaho all have -- do their examinations pretty much at the same time in conjunction with the coordinated supervisory review that is done at the holding company in the middle of the summer.

As Mick mentioned, we have an external credit review consultant who does commercial credit reviews on an annual basis. Spent two weeks -- one week in every bank for sure, a couple of weeks in our larger affiliates. His work has been signed off by both the regulators and our external auditors, BKD. And BKD actually steps into the banks, does a review of primarily the loans and the allowance evaluation every year. He is actually physically in the banks reviewing those and then reviews those on a quarterly basis throughout the year. We supply that information to him.

So we get some coverage there as far as the allowance evaluation on an ongoing basis and we feel pretty comfortable that where we are at has met the test, both at the regulatory and the external auditor level and external credit review level too.

One thing that Barry just reminded me too of, Matthew, that obviously this has always been a burden. It has always been a huge cost, but I guess in these times there is just one more thing I guess we can somewhat hang our hat on and that is that -- again, if we were a one bank holding company we would have to deal with SOX one time. We have to deal with SOX 11 times.

Every one of the banks, we have got BKD and we have got our internal audit staff documenting, testing all of the controls out there in every one of the banks, and having reports issued separately, separate SOX reports, issued by our internal audit and then validated and attested to by BKD. So I mean the oversight -- I think I feel pretty good about the oversight.

I think we have tried to put together a process that is pretty tight and I guess we could only hope that we are covering all of our bases there. We haven't had any surprises so far this entire year. And I mean a surprise outside of all of a sudden a borrower whose current and in no problems just coming in one day and throwing the keys on the desk. That has always been a surprise. But we have not had any surprises where the banks didn't understand what was going on in their markets and didn't convey it to us.

That is great. I appreciate all of the color. The lastly --

That is great. I appreciate all of the color. Then lastly, has the current environment, how rapidly it's deteriorating changed your appetite for deals despite the offering and given your construction exposure that you still have and I guess a view that maybe there is never enough tangible capital, potentially? Just curious as to whether or not your appetite has changed at all?

I would be lying if I said it hasn't, because I mean it has got to. You look at the huge amount of capital we have built up in this company, but every day as this economy gets worse and worse and worse and this country starts to just spiral further and further down, I think it would be -- it would be foolish not to be thinking that, hey, maybe we need all the capital in this company right now.

Yet we are still looking. I think we are trying to be very selective in what we look at. Clearly, if we could find more Bank of San Juans we would be very, very interested. But, yes, in the back of all of our minds -- we have had these discussions at the Board meeting too. You have got to be somewhat cognizant of the fact that if this thing only gets worse over the next 12 months to 18 months to 24 months you want to make sure you have a lot of dry powder.

And plus -- I think there is one other point that I would like to make and that is that with us we are doing these deals that are not huge deals to begin with, especially for our size now. And that is the way we like it. We don't like to take a lot of risk. We don't like to take a lot of integration risk. We don't have any egos that say we have to get to a certain size, because that never enters the equation.

But we want to make sure we do them right, we want to make sure we can keep our arms around them and these things take time. I just don't think you are going to find where you are going to be able in this company, at least for us, to sit there and do four or five deals a year. I think it would put way too much stress and strain on the Company and probably take our eye off of what we should be doing.

That is very helpful. Thank you.

(Operator Instructions)

[Brett Robinson]

Kind of a follow-up on that, wanted to ask is there a minimum level that you kind of are looking at today that you would take tangible equity down to with an acquisition, if something more than $150 million in size came to fruition?

$150 million in assets?

Yes. No, I'm just asking is there a minimum capital ratio for tangible equity that you would consider the new standard for yourself, even though -- just thinking about deals, is there a level that you don't want to go below this in any type of acquisition?

Not that we have actually stated, Brett. We have always -- a couple of years ago we always said that we wanted to keep our tangible common equity something north of -- now this was back in '05, '06 -- something north of 6.5%. Obviously, we are 3% greater than that right now.

Probably in this environment you would have to ratchet that up, but we haven't really said and put -- that would clearly be something that would be on the table for discussion with any transaction. But no, Brett, we haven't said okay, we are not one to take this thing down below 9% or anything like that.

Okay. Then I wanted to follow up on something with Barry just about -- as the banks are talking to the customers. I was curious to hear if there has been the ability to go back and get additional sources of collateral or how the negotiations have gone with projects, whether they be land development or resi construction, kind of how that has gone the past quarter or two?

Actually, that is a great question and what we are seeing overall is in the last quarter, actually in the last half of last year, a lot of our developers are running out of interest reserves and resultingly you have seen the increase in the NPAs go up. We have had some success stories where we have either -- we went in to the transaction at a cost basis that there was still some equity, even given some discounts and prices, and the increase in absorption periods where we have been able to create an interest reserve and still have an adequate margin in the collateral.

But, generally, I think across the board on a lot of the product out there that these guys are running out of refinancing. Their personal assets, are selling personal assets to carry the projects, and I think it's going to be a challenge for us going forward given what we have seen in the last 60, 90 days. Especially given the fact that land values are really the key, the market is the key. If this market stays soft this coming year we are going to face some challenges and generally we are going to have to get pretty aggressive in managing those assets.

Okay, that is good color. Great. Thank you.

Ben Crabtree.

Thanks. A couple of follow-on questions. One, Mick, you kind of touched on this in terms of extending some of your funding but how would you characterize the balance sheet right now as being asset sensitive, liability sensitive, etc.?

Right now I would say that -- and we don't have our 12/31 modeling done, but as of September 30 -- and granted we have done -- we have put on some longer assets in some muni purchases that we made during the quarter. But at the same time, a big chunk of the muni purchases we made in the fourth quarter we have extended those borrowings out. So that really shouldn't have too much of an impact.

But, Ben, going back to September we were still pretty neutral. It just really didn't make much difference. And, of course, now with our new model one of the things that is going to have to be taken off the model itself is a down 100 basis point or 200 basis point environment. That will not happen anymore. So let's face it, we will be only looking at -- the books will be a smaller this time. We will only be looking at what could happen when rates move up.

But when we look at a number of -- when our consultant puts those out, there is a number of scenarios we are looking at. And now we are looking -- probably what we are going to look at now that we didn't do in the past is 200 basis point, 300 basis point, 400 basis point, 500 basis point, 600 basis point rises and what those will do. In the past, when rates were higher we would look at 100 basis point and 200 basis point down and a 200 basis point and 400 basis point up. But my guess is we are going to ratchet that model in a different direction right now.

But as of September -- and those were the last numbers we have right now because it's still going to be another week or two before we see December's model -- but to the best of my -- to the last data we had we were pretty neutral. It really didn't make a huge difference in our net interest income on a consolidated basis. Now, Ben, there are some banks that are more asset sensitive and there are other banks that are more liability sensitive, but when you consolidate them it was a really pretty nice neutral position.

Are you comfortable looking at that only on a quarterly basis, given the volatility of interest rates?

We used to only do it every six months and a couple of years ago we backed it up to a quarter. I think if we tried to do it every month there wouldn't be enough changes. There truly wouldn't be enough changes in the balance sheet to justify the huge amount of work that goes in, because when we get this model back, I mean, for all the banks and the consolidated it's a 4-inch thick book. So there is a lot of things that go into that and to try to do it monthly or twice a quarter would just be too much for the benefit we would get out of it.

Okay. Secondly, it seems to me that I have read -- and I'm not sure about this -- but continuing kind of some negative headlines about the Seattle Club. Do you have any exposure that is -- I assume there isn't any real dividend coming out of there, but any vulnerability there?

Yes. I mean, we have got another non-earning asset again. I mean, we had it for two years and we started getting a little bit of -- we were up to live 1.4% dividend. Now we are back -- in the fourth quarter we are back -- we took -- obviously, they announced where they didn't have one and we are not expecting -- in fact, in our planning for 2009 not only did we not -- that was one negative. That cost us just about $200,000 in the fourth quarter.

Our expectations are that there will be no dividend for the next four quarters and as a result that is the way it is. I don't see it changing anytime soon. We are going to see that -- I think that FHLB Seattle is going to horde capital. It's unfortunate that the marks on the mark-to-market made them do what they had to do in the first place, because that is almost -- borders on insanity but that is the way it is. That is what they have got to account for and as a result, we have no expectations of getting a dividend in 2009.

And how big is that position?

It's right around -- last time I looked it was $45 million, I believe. $45 million. Obviously, again, for the two years prior to '07 there wasn't much in the way of dividend then either but we started getting a little bit of one. Now that is gone too.

Then the last question is the salary and benefits line. You highlight a couple of special factors that cause the sequential decline. Certainly, I guess I didn't have that built in my model. Trying to get a sense of -- was there -- some idea of how big any kind of reversal of bonus accruals might have been and how big the drop in commission income might have been. Just trying to come up with a reasonable number going forward.

Yes, the commission number is definitely down because volumes are down. I don't have that number. I know that in the fourth quarter there was at least $1 million pretax that we benefited from the reduction in our profit sharing plan. But here again now going forward, we are expecting that that, for 2009, that profit sharing plan is going to be at a fourth-quarter run rate too.

Because here again, as I have said I think before to all of the analyst and to many of the investors, nobody takes a bigger hit when we build capital the way we have built capital than the 1,700 employees. Because we have got both our stock option plan and we have got our profit sharing plan that are both directly tied to return on equity, and that is GAAP equity. When GAAP equity is going higher and higher it's tougher and tougher to generate the same returns.

My guess is that both of those are going to be no higher than where they were in the fourth quarter on a fourth-quarter run rate. They actually could be a little bit lower.

Interesting. It's an interesting perspective. Thanks a lot.

I am showing no further questions at this time.

Very good then. Again, we thank you all for joining us this morning. I guess my final thoughts are it's -- I don't care how long you have been in this industry. You can be in here 40 years or 50 years and I guarantee you haven't experienced anything like what this banking industry is going through and the changes we are seeing.

As I said in my comments, up here in this part of the country we are pretty blessed that things have not gotten any worse than they have. They have been actually, relatively speaking, not bad. But I think all of our bank presidents, all of our boards of directors, all of our staff, we are just prepared that 2009 is just going to continue to be a grind. And I can't think of a better word. We are just going to keep grinding.

We are going to have more asset quality issues, but we like the earnings momentum we have got. We like our ability to deal with those asset quality problems and reserve for them. So we are just going to have to see where the next couple of quarters take us, but I think it's going to be a real challenge. But, again, I like where we are at, I like the capital strength we have built, and we are just going to keep trying to do our best.

So thank you all very much and we will talk to all of you later. Bye, now.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect at this time.