Glacier Bancorp Inc (GBCI) 2009 Q3 法說會逐字稿

Good day. All parties are now online in a listen-only mode. Later there will be an opportunity to ask questions. (Operator Instructions). Is now my pleasure to hand off the conference to your moderator, Mick Blodnick.

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

Last night we reported results for the third quarter of 2009. The results were a loss of $1,531,000, or $0.03 per share. Also however, we had a gain on the sale of securities of $2.7 million, pretax, as we decided to sell a block of taxable muni's we purchased last November, and I'll get into that in just a second. Excluding the gain on sale, the operating loss for the quarter would have been approximately $0.06 per share. This compares to earnings of $12,785,000 last year, or $0.24 per share. However, last year's quarter was negatively affected by the OTTI charge we took on the sale -- or not the sale, but the OTTI charge on the Freddie Mac and Fannie Mae preferred and common stock, which reduced last year's earnings by $0.09 on an after-tax basis.

As many of you know, we usually don't take a lot of gains, but last November we came across the time where in one day there was a significant disruption in the market. We had an opportunity to buy some taxable municipals, which we usually don't purchase either. Since that time these municipals had increased dramatically in value, and the gains were just too good to pass up this quarter. So we did take the gains on some of those taxable muni's that we purchased.

We continued to generate good core earnings momentum with our pretax, pre-provision earnings, excluding the gain on sale, of -- which was up 7% over the same quarter last year. And so far through the first nine months, again, excluding gains and any other extraordinary income, our pretax, pre-provision earnings are up 18% for the nine month period ended September 30.

During the quarter, and the main reason for the loss was during the quarter we provisioned over $47 million for the loan loss reserve, pushing our allowance for loan and lease loss to 3.10%, which was a sizable increase over the prior quarter's 2.36%. As we have been saying throughout this year, we want to make sure that the ALLL is adequate to handle all our credit issues, and I am sure we will get into more of that as the conference continues.

With the $47 million increase -- or provision, I should say -- this quarter, we covered our net charge-offs 2.5 times, and that's even with net charge-offs being higher than what we had previously discussed. I think for some time and through the first two quarters of the year we were -- experienced somewhere between $10 million to $12 million in charge-offs a quarter. We expected that to continue.

And that did not continue this quarter because our charge-offs ended up being a little over $19 million. And the real difference was a $7.5 million write-down of a North Idaho development that we reevaluated at the end of the quarter. Not only was that the real difference between what our prior expectations were, but this also turned out to be a majority of the $8.8 million we charged off or wrote down in land development. So of the $8.8 million that came out of that category in the quarter, $7.5 million of the $8.8 million was the write-down of that North Idaho development.

In addition, we charged off in the quarter $2.8 million in residential construction, $2.1 million in term residential loans, and then we also wrote off $1.0 million in HELOCs, all this during the third quarter.

Asset quality continues to trend the wrong way, as we saw another increase in our NPAs to 4.1% of assets, as we aggressively moved any stalled development loans to nonaccrual, even if the loans were still performing. Although we've been saying for months that we expected higher levels of NPAs through the end of the year, we definitely think and hope that that pace will begin to slow. However, that did not take place in the third quarter, but we think the actions we have taken in identifying and addressing these poor credits will prove to be adequate as we continue to battle through this credit crisis.

Most of the nonaccrual loans continue to center around the single-family residential construction, land, and land development area. Of the $185 million in nonaccrual loans, $32 million is in single-family residential construction, $17 million is in raw land, and $68 million in land development.

One area we continue to make progress is in reducing our land development exposure. The land development portfolio -- again, it's as we have been saying over and over for the last two or three quarters, it's a finite number. We are not adding and we are not doing any land development loans going forward, so that's a finite number. And during the quarter that number decreased from $289 million to $244 million, of which only $8.8 million of the decrease was a result of charge-offs or write-downs. So we are seeing where we are being able to move some of these land development loans.

This past quarter we went through classified -- and classified all stalled land development projects. At the end of the quarter that totaled $132 million of the total $244 million in land development loans. $68 million of that $132 million in classified loans are on nonaccrual.

In addition, residential construction, we decreased that portfolio from $272 million down to $238 million. But unlike the land development where there's just no more loans being made, we continued to make additional residential construction loans to some of our very good builders. However, even though we are still active in that line of business, we still saw approximately a $34 million reduction in overall residential construction loans during the quarter.

Net charge-offs for the quarter hit a new high for us at 47 basis points, or 188 basis points annualized. Through the first nine months of the year, our net charge-offs were 97 basis points, so unfortunately it doesn't appear that we will keep our net charge-offs under the 1% for 2009 as we had hoped. That number clearly will be something above 1% now for 2009. With the $47 million in the provision this quarter, we have now set aside $88 million this year compared to $16.3 million last year through the nine-month period. And year to date we've covered our net charge-offs 2.2 times.

One positive credit trend was our 30 to 89 day early stage delinquencies declined from $62.6 million in the June quarter to $43.6 million at the end of September. This is the second quarter in a row we saw a decrease in these delinquencies, although this quarter's drop was much larger than what we saw in the prior quarter.

Our capital levels continue to be very strong as we maintain a solid balance sheet. Stockholder equity ended the quarter at 12.0% versus 10.8% in last year's quarter. Our tangible common equity ratio also increased during the year. Tangible common equity ended the quarter at 9.6%. That compares to 8.1% the same quarter last year. Right now in these unsettled times it gives us some real comfort to have capital at these levels.

Loans decreased during the quarter by $82.5 million, which included a $37.7 million reduction in warehouse loans. So taking out the warehouse loans, we had approximately $45 million in reduction in the loan portfolio.

As we enter the winter months, we would expect further reductions in the loan portfolio through the end of the year. Loan demand has been very soft, and until businesses and consumers start to feel better about the prospects for job security and economic growth, we don't think there will be much loan growth in the near term for us or the industry as a whole.

Although credit quality continues to be a significant issue that consumes a great deal of time, there continues to be a number of positive developments taking place within the company. Our net interest margin, although down again slightly from the prior quarter, is still at levels we have not seen in years. Sequentially, our net interest margin decreased 7 basis points in the third quarter to 4.80%. But that's still up from 4.65% in last year's quarter.

Loans that we added to nonaccrual status this quarter lowered our net interest margin by 13 basis points, so on a normalized basis, without that it would have been 4.93% for the quarter. However, last year's -- or last quarter when we ended the quarter with a 4.87% margin -- net interest margin -- that was impacted by 10 basis points in the June quarter. So there was still about a 4 basis point normalized reduction in the net interest margin from the second quarter to the third quarter.

Interest expense decreased 1% sequentially during the quarter, where we were basically flat in interest income. We've stated over the past several quarters it would be difficult to further expand our net interest margin, so although we have seen a couple of basis points of contraction in the net interest margin, it's still holding up very well.

Noninterest income up $21.7 million increased 2% on a linked quarter basis. However, again, if you exclude the gain on sale of securities, noninterest income actually decreased by $2.3 million. And all of that can be attributed to the $3.5 million reduction in the sale of loans, definitely as refinance activity slowed down in the third quarter from what was a very strong second quarter.

The other noninterest income categories saw some levels of increase over the prior quarter, including our miscellaneous fee income on deposit accounts showed an increase in the third quarter over the second quarter numbers.

Another bright spot was deposit growth was very good during the quarter. Noninterest-bearing deposits especially grew at a 6% clip. And interest-bearing deposits grew 7%. This is the second quarter in a row where we have seen good deposit growth, especially in noninterest-bearing deposits.

Another area we are pleased with was the efficiency ratio. Considering the increases this year to FDIC premiums, last quarter's special assessment, as well as much higher legal and OREO expense, the ratio ended the quarter at 51.0%, which was again better than the 52.5% in the June quarter and far better than the 58.0% from last year's third quarter. The banks continue to do a stellar job of controlling expenses, both operationally as well as on the funding side.

In summation, this was a difficult quarter for us. Only time will tell if the continued buildup of our allowance for loan and lease loss and the huge provision this quarter were too aggressive. No matter, we felt -- no matter what, we felt it was the right thing to do. It continues to be a difficult operating environment for banks, and the uncertainty sways us to take a very conservative posture as the economy still faces some difficult hurdles.

Nonetheless, we are fortunate to be producing record strong operating revenue. The economies we operate within are still for the most part doing well. There is little doubt that credit quality will continue to be a concern and one we will have to continue to grind through over the next couple of quarters at a minimum. However, based on all the stress testing we continue to do, we are confident that our strong capital base is more than adequate to withstand the most difficult of scenarios.

And with that I will open it up for questions, and turn it back over to the operator.

(Operator Instructions). Joe Gladue.

First off, I guess I was just wondering if maybe you could give us a brief overview of the economy in the states you are operating in, if there's any that are -- if you could just highlight which are the I guess most troublesome areas and some areas that you might think are holding up better.

There is no doubt that of all the states we operate in, Idaho is the state that is the most problematic for us. It's probably no -- it's no new news to anyone that clearly the Boise market has been a stressed market for a long time.

And we have been working through that Boise market for the better part of two years. And I think actually we are starting to see some signs in Boise that things are at least bottoming out. I'm not saying they're having a huge improvement, but it looks like things are bottoming out there.

But the overall Idaho economy, especially Boise and the northern part of the state, is softer than any of the other states that we operate within. It's -- the one bank that we have operating in northern Idaho is the one that's probably been challenged the most of all of our banks. There is no doubt it has been challenged the most.

And I think it's more a function of just the economy in that state. Unemployment in Idaho is right at about the national average, where if you're looking at Montana, Wyoming, Utah, some of those additional states -- Colorado, where we have a presence, that unemployment rate is far below the national average.

So yes, of the geographic locations we are in, there is no doubt that Idaho is the most stressed. And Idaho is the area that all last year made up a majority of the charge-offs that we have seen. And the same holds true for this year. The write-downs and the charge-offs we have experienced have primarily come out of the Idaho market.

What trends are you seeing in the commercial real estate area? Is that still holding up relatively (multiple speakers)

It really is. I don't want to sound like a broken record here, but we've analyzed that constantly. Like I said in my remarks, our problems continue to center around the area of land development, residential single-family construction, and a little bit of raw land -- although even the raw land in comparison to the other two components is far less worrisome. But we just have not seen much in the way of huge problems on the commercial real estate side.

Now we did see -- this quarter we did see an increase in some of our NPAs as a result of some of the non-owner-occupied commercial loans that are out there. But it wasn't still anything close to the level that we are seeing in those other three categories.

But it's something that -- we are not just turning a blind eye to this either. We are very, very vigilant in following those trends on the commercial resident -- or the commercial real estate side.

And Barry, do you have anything more to add to that?

Yes. Last quarter we had about $12 million in nonperformers in our commercial real estate, and we are at $19 million. So we went up $7 million, but nothing to the extent that we saw in land -- or land development.

I'll ask one more and then step back in the queue. Just wondering if you've had any change in attitude towards FDIC assisted deals. Some of them have looked pretty attractive of late. Get your thoughts there.

Here again -- and I think we talked about this -- or I know I've talked about this during the quarter. I'm not sure this came up last quarter, but -- on the call, but the FDIC assisted deals, they probably don't work real well for us in the fact that there's no way we are going to go into a new market or go into a new location with an FDIC-assisted deal, because our model of independent banks doesn't play well to trying to go out and establish a new management team or do things along that line.

I think that if there was an opportunity to gain deposits or if there was something in an existing market, yes, I guess we could take a look at it. But there just hasn't been anything in our markets to speak of. And maybe that's a good thing, because -- well -- and again, our market, if you want to add eastern Washington to that market, I guess you could say that maybe down the road you could see some things.

But so far -- knock on wood -- states like Montana, Wyoming, Idaho, they just don't seem to -- Colorado -- don't seem to have too much in the way of major problems, especially in those areas that we have a presence. I think if there was ever an interest down the road for us to look at something like that, it would have to be an FDIC-assisted deal that we could fold into one of our existing banks. So --

Fair enough, thank you.

Brad Milsaps.

Just a couple of numbers questions. I think I have the land developments down to $244 million, and the single-family construction was down to $238 million. What about the remainder of that book, some of the -- I guess the commercial pieces and the other parts that typically get you closer to $1 billion in construction?

Barry's got all those numbers. I'll let him go through those. You were right about the $244 million and the $238 million. Those are well over -- those make up about 60% of the portfolio now. But the remaining piece, I'll let Barry give you some color on that.

Of the $238 million of single-family residential construction, $157 million is spec and presold, and $81 million is custom all-in-one owner-occupied. Raw land is $127 million. Again, we've mentioned the land development is $244 million. Consumer lots is $189 million. Developed lots for our builders -- these are builders that actually have builder lines and they build on a regular basis -- is $47 million. Commercial lots is $20 million, and other commercial construction is $75 million.

And I think, Barry, we saw a small increase in consumer land --

Right.

-- lots. The portfolio increased slightly, and that is probably a function of some consumers buying into some of these lots that are relatively cheap right now.

Right. We -- in some of our developments, either the ones we've owned and/or the ones that the developers are still selling lots, we've put together some attractive financing packages trying to move some of those lots, and we are seeing the result of that -- would be my guess there.

It wasn't a big increase, but it was a couple million. At least it's not going down like most of these other categories.

Right. So most of these other categories -- I'll have to go back and check the numbers from last quarter, but they were maybe down slightly but not in any way, shape or form like land development or the single-family residential construction?

That is correct.

That's correct.

And then you talked about $132 million of stalled land development projects -- if I have that correct. Or (multiple speakers)

That is correct.

And those were -- and you said that $68 million were on NPA. Just want to reconcile that with some of the numbers you gave last quarter where you talked about $110 million of sort of previously identified land development loans, and then you put $75 million of those on the nonaccrual and into OREO. Certainly you've uncovered some others here. Can you help me kind of link all those numbers together?

You bet. And we kind of figured that that was going to be a question. We have been very upfront about that $110 million. I think a couple of things have taken place. Number one, during the quarter we went through and in the third quarter we got very aggressive with every one of these stalled projects. And we started really taking a look, and whether -- again, whether they were performing or not, if they were not selling, we put them and we classified them. And that's what I'm -- the $132 million is all the classified projects.

But at the same time, towards the -- as the quarter progressed, as we really started to drill down into some of these projects and put them on -- and classified them, I think we did uncover a couple more that -- again, they are not on nonaccrual, but we just felt that if we are going to be aggressive we better add these to the -- additions to the $110 million that we've been talking about.

So yes, you could say that in this process that we went through during this last quarter, there's about $20 million more that we have looked at, looked closely at and added.

Barry, you got any more to say to that?

Yes. What -- it's a combination of two things. If you look back for the last two and a half years now, the market for lots has basically ceased. And a lot of our borrowers just continue to struggle, either trying to bring in outside resources, equity, investors or in the case, looking at short sales in some instances, so -- with the combination of some deterioration in that portfolio, continued deterioration in that portfolio.

And in conjunction I think there has been a -- as you've probably heard from some of your other -- of the other banks, the regulatory environment is such now that any stalled project is automatically classified as substandard. So we've taken that posture pretty much regardless of the outside investor --

Capacity.

-- capacity or strength. Only in the rare exception of where we would see that the project is still -- there's some activity in the project, there's some lot selling, have we not classified the credit. Or where we can fully document and support that the capacity of the guarantors or investors outside of the project can repay the project, would we not classify that project anymore. And frankly, in the case of the review we went through this quarter, that's why we did add quite a few new projects to our stressed land development portfolio list.

Barry, I know when I was there a few weeks back you talked about the foreclosure process and how you guys were handling that. Can you give any color on how you plan to deal with some of these loans that you have taken back? Would you suspect we'll see a more meaningful increase in OREO next quarter? Or in some situations I guess you're trying to continue to work with the borrower to -- and it may kind of remain on nonaccrual for some period of time?

If we have -- both scenarios are correct. With those borrowers that we feel have a fighting chance I guess to ultimately have some -- carry the projects from outside sources, or at least they have a better chance of marketing the projects than we do, we will continue to work with them.

In the other cases where we feel that the project is probably in a poor location, there's just not a lot of other potential to move the project, we are starting foreclosures. And as you know, we will see an increase in OREO in the next year. And resultingly I think we will see some increased loss come out of that as those loans transition into the OREO portfolio. So we are going to see some increased loss come out of that -- those transactions.

But we are working both ways. And it's -- we look at it on the individual basis, and we decide which way we want to go. Do we hold and hope? Or sell and suffer? As I've often said. So we are doing both these days.

At the end of the day what we have seen is that the activity on these projects, or at least the offers on the projects, truly from people looking at these projects has not come while the developer owns the project. They are all sitting on the sidelines until the bank gets the property back and into their OREO portfolio before we are seeing any meaningful offers -- either on lots on a retail basis or on bulk purchases.

So going forward, why traditionally we've worked with a lot of these borrowers and tried to do some restructure, some TDRs, the general consensus is, I think we are going to take a much more aggressive approach and take either deeds and lose continue our foreclosure actions, because we just haven't seen the activity that we would like to see from a developer side versus the bank-owned properties.

I'd like to add one thing to Barry's comments, and that is that we've probably been pretty passive so far on our OREO properties. We haven't been -- I don't think we have been as aggressive marketing these as we could have been. And we have recently been talking about some steps that we are going to take to get the word out to start to market some of these OREO properties that we have, much more aggressively than we probably have over the last couple of months.

In a number of these, we think the values and everything -- from every indication we have been able to analyze, values on a lot of these things are there. And we just need to start to get the word out. And I just don't think that we've really done as much as we probably could to market some of these projects. And we're going to start being a lot more aggressive in that area.

Thank you very much.

Matthew Clark.

Good morning guys. Along the lines of the breakdown of the construction book, would you -- and I know you were able to give us the nonaccruals in the land development portfolio, I think of -- on about $68 million, and the single-family and resi construction, I think you gave us $32 million. Could you also provide those numbers for the other categories you gave us from an outstanding loan balance perspective, including raw land and so forth?

Raw land is $17 million.

Oh, right. I'm sorry.

So the $117 million of the $185 million was in those three categories. And I'll let Barry give you the breakdown of the rest of them.

Just to kind of recap, the single-family residential construction was -- again, was the $32 million. Commercial ops was $1 million. Consumer land and lots is $8 million. And then lots for builders is $6 million, and again land development is $68 million. And unimproved land is $17 million.

Great. And then similar to the commentary around classified within the land development book, you've got I think about 13% of the single-family resi construction book in nonaccrual. Just trying to get a sense or some visibility within that $238 million, with the exception of $32 million that's on nonaccrual, in terms of what else might be classified behind the scenes there that we might see in the coming quarters flow into nonaccrual.

On the residential construction piece?

Yes.

That's obviously a much more fluid -- unlike the land development, like I said earlier, which is a finite group, it's not getting any bigger, it's only getting smaller. On the resi construction that is more fluid because you've got new loans coming on versus others coming off.

I'll let Barry give you a little more color behind those numbers. But the one good thing on the resi construction is we did see a decrease. Again, even though we are putting more loans on overall, there was a decrease in single-family residential construction. And we are starting to see where even some of the high-end homes, for example, in Boise this quarter, we sold six or seven homes in the Boise market that were all above that $500,000 price range.

So where we thought that -- and we have found over the last year so that higher-end price range was really slow and almost nonexistent, we did this last quarter. Now, out some of those came with obviously some discounting that took place to move those. But we are starting to see a few of those buyers. And it's not just those individuals that are centered on that $200,000, $250,000 price point house.

With that, I'll turn it over to Barry and let him give you a little more guidance.

Yes. Breaking out the single-family residential construction into owner-occupied and non-owner occupied, in the -- basically the spec is about $157 million, and basic of that, about $70 million is what we would consider stressed. These are usually builders primarily in our Idaho market that are working out through some specs and a few presolds that they have been holding onto for the last year or two.

And then the other major component is in our Glacier Bank Kalispell area market where we are working through some of those portfolios.

So a fairly good portion of that is stressed, but as we noted that portfolio is coming down and we're working through that. And fortunately so far we haven't seen a significant amount of loss in there as a percentage of those totals, albeit it's one of our larger loss categories.

Okay. Great. And then in terms of -- from an affiliate perspective, can you give us a sense for let's say maybe take for example the net increase in nonaccruals this quarter, call at $70 million, and maybe break it down by affiliate, if you can, in terms of where that came from.

Yes. That -- it's two areas, two banks -- is the bulk of it. And these are total NPAs. Our OREO only went up a couple million, so you can basically take the rest of it as nonperforming loans.

Nonaccrual.

Or nonaccrual loans -- yes.

Glacier Bank went from $54 million to $84 million, which is a $30 million increase, and then Mountain West Bank went from $38.5 million to $62.7 million. And then First Security Bank went from $33.8 million to $39.4 million, and First Bank went from $13.7 million to $18.3 million. And that's the bulk of it there. The rest of the banks were minor changes.

Great. And then lastly if I may, it looks like you guys wrote off the northern Idaho credit. I think that came on the books last quarter in excess of $10 million. It looks like you took around a 70% hit on that. I assume it's gone. But do you have any other developments of that magnitude? I think there was one, maybe West Elm, that was $18 million last quarter in land development. And any other I guess slugs like that that you're keeping an eye and might have to reevaluate?

Well, just to clarify, the ones that came on last quarter were the one down in southeast Idaho. That was the large one, the 20-plus million dollar project down in southeast Idaho. And then the other project was up in northern Montana. That was approximately a $14 million project there. But those two came on, and we talked about them last quarter.

This one was a north Idaho one that just came on this quarter. And we had identified it as being a project that definitely had some weaknesses and that, but it wasn't -- and even there -- let me just go through a little detail. We had a couple of appraisals done on that project. One appraisal was based on its highest and best use. And that appraisal was about $3 million greater than the one that we used. And we just felt that project, as it stands right now, is the appraisal that we needed to use in order to justify that value, because you can't be thinking about what might be or what could be. We had to take that project as it stands, and it was a single-family residential subdivision, and we got an appraisal. It was lower. And that's what we ended up using.

But it resulted in about a $7.5 million write-down for us now. Now, time will tell as to what we actually end up charging off or if we charge off anything, but we chose to be very conservative and write that project down by $7.5 million.

Great, thank you.

Jeff Rulis.

Good morning. Looking -- I think, Barry, you touched on this. Do you guys disclose the restructured loan balance or TDRs? And if you do, what was it last quarter? And what is it this quarter?

Yes, we have that. This quarter it's about $17 million, TDRs. I believe -- let's see -- hang on a second. We have the information here. It's in my stack of information. I think this quarter's $17 million, and we break it -- we have TDRs on accrual status and nonaccrual status. So out of the 185 -- we have total $185 million in nonperforming loans, and that includes some --

Nonaccrual.

Nonaccrual loans. And then in addition to that, we have total impaired loans of $207 million. So the difference is TDRs, performing TDRs.

Okay.

And TDRs with the accountants is a hot issue now, so any time you have a restructure or you make a concession, albeit the loan can be performing or whatever, generally we will -- where the main challenge is just lowering the rate from something that you previously have to either a current or a below market rate. And you automatically have to classify them, so -- as TDRs, so that goes into our 10-Q impaired loans numbers.

And switching gears a little bit, will you guys look to continue to build that investment portfolio given soft loan demand? And if so, if you could discuss any expected impact on the margin (multiple speakers)

Yes. I don't think there is any doubt that if there is no loan growth and you still have a relatively steep yield curve, although we are probably going to err more on keeping any investments, the duration on those investments very short, we are reading like everyone else that I don't think there's any imminent increase coming in interest rates, but still I think it's been our posture this last quarter and probably over the next subsequent quarters to keep that investment portfolio and any new purchases, again, with relatively short durations.

But yes. We've got deposits and that. The deposits are growing. We don't see in this yield curve environment any reason to shrink the balance sheet. So we do plan on probably purchasing more securities, and there is no doubt that that will have an impact on the margin. I mean, as you continue -- like even on a net basis, we had $45 million in loan reduction this quarter. Well, my guess is those loans on average are somewhere in that 6.0%, 6.5% yield base, and if you're going to replace it with very short-term agencies in the 2.0% range, you're giving up some spread there.

So yes. I mean, I don't think it's any big secret that that would put more pressure. And we probably will continue to see some compression in the margin.

But at the same time, one other thing that still we have going for us is, there's still at least -- I haven't looked at the September numbers yet, but at June there was still approximately about $1.060 billion in CDs that had still a weighted average rate of about 2.6% or so. So we continually will have some of them rolling down the curve, and we will be able to probably reprice some of those. So that will definitely offset some of the lower yields on the asset side.

Thanks. And on the loan side, you did mention it was soft across the board. But any pipelines or categories, either geographic or within segments, that you may see some pickup or you're becoming more -- you feel better about a certain area or segment?

We still are seeing some commercial real estate loan growth in some of the projects. I don't have the breakout of owner-occupied versus non-owner occupied. Barry, do you have that breakout?

Yes. We -- what -- probably the only spot that we have seen some growth in the last quarter is our owner-occupied loans went from $737 million in June to $779 million this quarter, which is a $42 million increase, and year-to-date that's a $156 million increase.

Non-owner occupied, actually we've seen pretty flat. We stayed about $320 million the last two quarters. So again, we're moving into what at least some people feel is the more conservative area. If there is any growth, it's in the owner-occupied commercial area.

The rest, pretty much all the other categories of loans, we've either seen declines or small increases.

Okay. And then lastly, do you have an updated total risk-based ratio?

We don't have it yet. My guess is it's going to -- and this is just a guess. But I'm thinking it's going to be probably at the same level or possibly higher. As we take more and as we're replacing more and more of this loan portfolio with securities, obviously our risk profile improved dramatically. And yet our capital is still staying constant. So my guess would be -- we won't have those numbers probably until the end of the month, first week of November. But I am guessing that our risk-based capital is going to be the same or higher than it was in June.

Great. Fair enough. Thanks guys.

Brian Zabora.

Good morning. On the reserve building, do you perceive the provision exceeding charge-offs by 2.5 times in future quarters? Or was this maybe a bit more of a building that we might see going forward?

No. We've been -- I think most of the year we have been right there in that 2.0, 2.5 times coverage of charge-offs. We have just made no secret of the fact that we are going to do whatever it takes to stay in front of these credit issues. And I don't see that stopping. I can't tell you what the provision would be in the fourth quarter or the first quarter, but I know we talked last quarter about hopefully by the end of the year getting our loan loss provision somewhere in that 3.0% range. Obviously we were past that, and we are only at the end of the third quarter.

But again, we are looking at -- like Barry said, the regulatory environment, you're looking at the credit environment, you got to look at the economy. And my guess is just the way we do everything else, we are going to err on the side of caution.

And if we continue to build, that's fine. I've told a lot of you that it's our goal to continue to maintain this fortress balance sheet. We've got lots of capital. We are building rapidly a ALLL allowance so that we are assured that we can handle any surprises or any further downturn in the economy. So I just think that for all of you, you just take that for what it is, that we're going to continue to aggressively do what we need to do.

And then on the northern Idaho project -- it -- Barry, it sounded like at the end of the quarter, does it have any implications for the rest of the portfolio? Is it an indication that values are falling? Or is there anything specific, I guess, unique to that project that maybe resulted in the write-off?

The total project was a little over $14 million, and we took of course the $7.5 million. The balance of that is in nonperforming status right now, it's in foreclosure. We would anticipate that we will -- because of the size of the property, it's a judicial foreclosure. We'll take some time to get the property back.

But there, we are looking at some options. The reason that this all came about is that we were looking at alternative use on that property and basically redrawing the lines through the property and changing the mixture of the development, and we thought we had that accomplished. That did not happen by the end of the third quarter. And so it's what Mick said, we just took the as-is value of that development, giving us a 10-year absorption period on those lots at a 25% discount, and so you run the numbers, that's about a 50% write-down, and that's what we took.

Just lastly, can you give a sense of maybe accounting adjustments for the First National transaction, whether purchase accounting adjustments or what you might see impacting the margin going forward?

We are working through that still. And we would expect to have those probably by the end of October. So let me not speculate. We are still waiting to get the information. We are using third-party experts on that to come up with the interest rate movement difference as well as the credit component on the loans.

Okay. Thank you very much.

Matthew Clark.

Just had a follow-up on OREO. That number is -- I think we -- you briefly had discussed how you are going to go -- be out there trying to mark those projects more aggressively here in the near term. But just trying to get a sense if you've had any outflow of OREO? And if so, have you taken any subsequent marks that might be in the noninterest expense line that we don't see? Just trying to get a sense for your comfort and with the process of going and getting those updated appraisals with the underlying value relative to where you are in on the loan.

That thing has been all over the place. We have had loans flow into OREO that we have subsequently sold, and virtually had no change, and in some cases maybe we were too conservative in what we place in that. Other times we've taken further write-downs through our noninterest expense line. So when you're talking about six states and you're talking about a fair number of projects, they truly are all -- it's kind of been all over the place.

I'd like to be able to say that, yes, we have seen where on average we have witnessed or experienced an additional 20%, 25%, 30% reduction from what we booked these in at OREO. But that hasn't been the case. And I don't have -- I don't really even have a good sense -- Barry, do you? -- as to what we -- on percentage basis what we are seeing there.

Well, we -- our OREO balance went up from $47 million to $54 million this quarter, so we haven't booked a lot. Of course the last quarter was the [West Rim] development for 20-some million, and that continues to be the component. Quarter to date, of all the OREO transactions, with the increase, we took about $1.8 million loss on sale of OREO. So on a $47 million, so you're looking at what, maybe a 4% loss ratio. That $1.7 million was in one large project this quarter that we went out and we evaluated all -- as we do every quarter, we either get an updated value on the OREO properties as we do a lot of our criticized classified loans, and we make any adjustments. So that's the number there that we took, loss on sale of OREO.

Okay, great. Thank you.

Brad Milsaps.

I just had one follow-up question. I wanted to make sure I had a number correct. Did you say $8.8 million in charge-offs this quarter in the landed development portfolio? Did I pick up that number correctly?

That's correct.

That's correct.

Yes. Of which $7.5 million of that was the write-down on the north Idaho project.

Right. And Barry, do you feel like you're just -- that where you're positioned in these loans -- it seems given the increase in NPAs we've seen there, it hasn't really translated into a lot of charge-offs yet. And I understand you're building the reserve at kind of a rate of 2.5 times that number per quarter. What has kind of prohibited you guys from being more aggressive on maybe charging those down in the framework that a lot of those are stalled and there's just not a lot of movement at this point? I guess I'm just having a hard time kind of reconciling that.

Well, this past six months we've ordered 357 new appraisals for all of our criticized classified projects and our OREO projects. And based on some appraisals which have some pretty conservative assumptions, usually what we are seeing is the 10-year absorption periods, 15% entrepreneurial profit requirements, and a 10% to 15% internal rate of return. So you're looking at anywhere from 25% to 30% discount rates, in addition to what we are seeing, pretty much the retail sales values of those lots dropping anywhere from 10% to 30% given the market conditions. I don't think we are seeing the discount in sales prices that we have seen in the last -- in 2008, because things moved so fast.

But we are seeing some downward movement there. And based on the appraisals and based on everything we are seeing, we do not have a huge amount of exposure. I think on all our $207 million in impaired loans, we have $23 million of impairment. And those are based on new appraisals that have been ordered in the last six months. So we are still feeling comfortable.

Whether or not -- I guess the second part of the question is, do we get aggressive and do we start discounting these properties off those appraised values to move them? Yes. I think we are going to have to take that look. Our nonperforming asset levels are reaching a point now that I think we have to sit back, say, what do we do to start moving some of these assets through? -- the pig through the snake scenario.

And I think we need to get more aggressive. That's been my message to our senior credit officers and banks' presidents the last 60 to 90 days. And we need to clean up this balance sheet going into this coming quarter and going into early next year so those numbers are level again that warrant that kind of strategy.

If you guys do decide to get more aggressive, would it be more difficult to continue provisioning at some kind of 2.5 times a charge-off kind of rate? I know you've talked about the 4% reserve, and I don't know if that's a reasonable assumption by the middle part of next year or not, but is that something you guys are thinking about? I know the question earlier was kind of about the reserve building in the quarter.

Yes. I think that you'd have to definitely take that into consideration. If you're going to really get aggressive and all of a sudden some quarter you're going to start discounting a lot of these projects where you're taking a $30 million or $40 million charge for a quarter, I don't see us doing a 2 to 1 coverage ratio on charge-offs that quarter. Maybe that time it would be a 1 to 1 or something like that.

I guess right now it's a little bit too premature to say what those levels really would be. I think Barry brings up a good point. I don't want to discount the fact that maybe we are in this position because of the values that we brought into the -- and some of the equity and the strength we brought into some of these projects. Barry is absolutely right. We have ordered just hundreds and hundreds of appraisals, and unless those appraisals are just absolutely worthless, then you got to believe that the valuations are pretty close here.

Now, can we still discount here and there? I think we started doing some of that in the third quarter, especially in that Boise market on some of these higher-end homes and had some pretty good success moving some of them. Do we have to take that to the land development side and start getting more aggressive? We might have to.

But I just can't tell you how aggressive we would have to get as far as writing these things down. When we've seen where any loan that was reappraised and if there was a shortfall, we have taken those charges or we have taken those write-downs. But I think it's going to -- I think we're just going to have to see how this whole thing plays out.

I think you're asking a very, very good and fair question, and it's one that we talked about a lot too. At what point in time do you start moving some of these OREO projects, and at what point in time do you start dealing more aggressively with some of these nonaccrual loans? Clearly sometimes -- and we said this earlier, on those loans that continue to perform, it's a little bit more difficult to take a huge write-down when the loans are still performing, so --

Okay. Mick, final question. How do you guys -- you have plenty of capital, but how do you guys kind of think about the dividend? I know you just approved another for the quarter, but I know that's something you've talked about as potentially that's kind of your -- that's kind of in your back pocket if you needed to. But just curious what you're thinking about that at this point.

We evaluate that every quarter, sometimes two or three times during the quarter. And we will continue to do that. We've got to make sure that we are taking into account the economy, obviously our earnings, our asset quality, capital levels. I said this before, we've worked very, very hard since 2006 to build up all of this capital, and it's served us very, very well. We've just got to make sure that going forward that the earnings can support a dividend, that our capital levels can support a dividend. And I can't tell you what would happen in the fourth quarter. I can just tell you that we are constantly evaluating it, and in my mind we will absolutely do what's right for the company and for the ongoing strength of that balance sheet.

Great, thanks.

I am seeing no further registered questions at this time.

Okay. Well, thank you all very much for joining us today. We are going to keep working hard here to try to continue to fix some of these credit issues. And again, I still like the position we are in with -- and I think we've -- here at the company we have done -- the last year or so we've done a lot of the right things, positioning the balance sheet and our capital to withstand some of the worst of times. And I think we've proven that those steps were very well taken when we decided about three years ago now to just really start to build that capital position up. We further enhanced that capital position last year, and so far this year we've easily been able to maintain that capital position, even though we have added dramatically to the ALLL portfolio, so -- or the ALLL reserves. So anyway, thank you all today, and we'll talk to you later.

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