Glacier Bancorp Inc (GBCI) 2010 Q2 法說會逐字稿

Good day everyone and welcome to the Glacier second quarter earnings conference call. At this time all participants are in a listen-only mode. Later you'll have an opportunity to ask questions during the question- and-answer session. (Operator Instructions) Please note this call may be recorded. I'll be standing by if you need any assistance. It is now my pleasure to turn the conference over to Mr. Mick Blodnick. Please go ahead, sir.

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 Officer, Don Chery, our Chief Administration Officer and Angela Dose, our Principal Accounting Officer. Last night we reported earnings for the second quarter of 2010. Earnings for the quarter were $13.222 million. That's an increase of 24% from last year's quarter. For the most part there was not much noise in our earnings for the quarter. We did book a one-time gain on the sale of our merchant card servicing portfolio, that amounted to $1.8 million pretax or had a $0.02 after tax impact on our EPS. Aside from that, there was no other notable nonrecurring income or expense items for the quarter. Diluted earnings per share for the quarter were $0.19, an increase of 12% over the prior year's quarter. Again, however excluding the gain on the servicing portfolio, diluted earnings per share were about even with last year's second quarter. The average share count, however, was 17% higher than last year's second quarter due to the issuance in March of 10.3 million additional shares as part of our secondary offering.

Our second quarter performance was about what we expected with no real surprises. However, there were some line items that did change enough to be noteworthy. First, our loan loss provision expense was $17.2 million. That was a decrease of $3.7 million from the prior quarter as some of our risk metrics showed improvement. Gain on sale of loans was up $2.2 million or 58% from the previous quarter as we've benefited from both a very attractive mortgage rate environment, especially in the last month of 45 days of the quarter, along with the activity spurred by the expiration of the Home Buyer's Tax Credit in April. Even with the significant jump in fee income from the first quarter, we were still $2.9 million or 32% last year's second quarter when refinance activity was extremely good. And the last noteworthy issue, OREO expense and write downs increased $5.1 million compared to the first quarter and the same quarter last year as our banks worked aggressively to obtain ownership and then dispose of foreclosed properties. Our ROA for the quarter was 0.85%. That was up from last year's 0.77%.

Our return on equity was 6.25%, a slight increase over last year's 6.18%, although still far from the level of performance we deem acceptable to our shareholders and what they expect. As the economy gains its footing and we continue to make progress resolving some of our credit issues, this ratio hopefully will return to a higher level. Nonetheless, with higher capital standards probably a sure bet moving forward, we don't think a return to the return on equity levels we saw in the earlier part of the decade will be in the cards any time soon as we continue to maintain all-time high capital levels. Our stockholder equity ended the quarter at 13.44%, that compares to 12.23% in last year's quarter and our tangible common equity increased to a historic high of 11.20%. That also compares to 9.71% in last year's quarter. Needless to say we have a very strong capital base that will allow us the flexibility to take advantage of what we believe will be some exciting and profitable possibilities in the next five years.

Credit quality, that was one of the areas that was a pleasant surprise and did show improvement in a couple of areas. For the first time in almost three years we experienced a decrease in nonperforming assets. Even though the drop in the dollar amount of NPAs was only 4% we had expected it was going to be another quarter or two before we saw any decrease in this balance. So that was a real positive and a pleasant surprise to us. NPAs to assets decreased to 4.01% from 4.19% the previous quarter but are still above the 3.06% from last year's quarter. Nonetheless, even though we saw some improvement, we still have work to do. We made some good progress this quarter now we need to continue to build on this momentum through the rest of the year. Even though NPAs moved in a positive direction this past quarter, it's still too early to be optimistic that things are going to improve rapidly. Land development loans which have been the biggest source of problem asset for us, was disappointingly higher this quarter increasing by $8.1 million to $84.6 million. However, spec and presold residential construction loans, another problem, area pretty much offset that figure by decreasing $8.8 million during the quarter and they're now down to $21.5 million.

Most other categories including unimproved land, C&I loans, commercial real estate and HELOCs were either flat or down. The only other category that really saw any kind of increase was the one to four family residential loans which totalled $26.6 million, that was up $1.5 million in the quarter. Another positive trend for the quarter was another decline in our early stage delinquencies. For the second quarter in a row, the dollar amount of those loans that are 30 to 89 days past-due dropped significantly. In the second quarter early stage delinquencies went from $61.3 million to $36.5 million or a 40% decrease and since the first of the year the drop has been even more dramatic, that drop -- we've seen that figure drop 58% from over $87 million. If we can continue to attack and stay on top of these past dues it should ultimately make it easier to reduce our NPAs or at a minimum fewer credits will flow into that category. Net chargeoffs for the quarter were $19 million or 2% annualized, about what we experienced the last two quarters, but still up significantly from $11.5 million in last year's second quarter. We expect the next couple of quarters for net chargeoffs to remain in this range.

We plan to aggressively dispose of NPA's for the rest of this year which will probably result in continued high chargeoff levels. So even though there's some reasons for optimism on the credit quality front. It's still a daily grind to work these troubled assets off our balance sheet while getting a reasonable price for them. Our loan loss reserve ended the quarter at 3.51%, that's down slightly from 3.53% last quarter, but up from 2.36% in the same quarter last year. As we stated previously, we would expect a provision this year to more closely mirror our chargeoffs especially since we don't figure to add much loan growth to the balance sheet this year. Through the first half of the year that is pretty much what we have accomplished as far as that one to one provision to chargeoffs. Our net interest margin continued to compress as we have been stating all through the -- although the rate of this compression did slow quite a bit from what we experienced in the first quarter. Sequentially, our net interest margin decreased 8 basis point. If you remember that compared to 27 basis points the quarter before, so we did see a slow down in the compression. But nonetheless, sequentially our net interest margin still was down 8 basis points in the current quarter to 4.35%. And was also down from 4.87% in last year's second quarter.

This is the fifth consecutive quarter of contraction in our net interest margin and while we understand the pressure to grow earnings, we're also keenly aware of the significant interest rate and liquidity risk that can arise by stretching for yield to deploy excess liquidity during the period when loan volume is hard to come by. We have resisted this temptation and are willing to accept the lower net interest margin rather than face the consequences of an ill timed extension in our investment portfolio. At a time of historically low yields that continue to move even lower in our estimation there's currently not much upside to extending our assets or reaching for higher rates. Hopefully any further contraction to our net interest margin will be at a slower pace similar to what we experienced this quarter or less, but extension and stretching for yield is just not something that we're going to do. Net interest income did increase by 1% on a link quarter basis, however it declined 1% over the second quarter of last year. With loan volumes still a challenge and not much room left to lower deposit and borrowing rates, we were pleased with the fact that our net interest income increased slightly during the quarter. Yet, I don't see much chance that there will be any noticeable gains in this area until rates start to move higher.

Loans declined by $40 million or 4% annualized during the quarter. This is about on target with what we have been projecting for the year and what we have been stating. And through the first half of the year loans contracted at a 5% annual pace, again, in the ballpark of what we expected. We had hoped that the second and third quarters which are traditionally our strongest for loan activity would produce an increase in loan demand, however that doesn't seem to be the case. Just the opposite of the loan portfolio, we continue to enjoy great success in generating additional deposits. Noninterest bearing deposits increased $23 million or an 11% annualized rate during the quarter, these low cost funds will serve us well, especially when rates start to move higher. We also saw higher levels of retail interest bearing deposits, which increased by $45 million or at a 6% annual rate -- annualized rate in the second quarter. Since last year's second quarter, total retail deposits increased by $616 million or 18%. This not only funded our asset growth, but allowed us to reduce our reliance on borrowed funds.

The next category, noninterest income, ended the quarter at $21.4 million. That was increase of $100,000 or 0.5% from last year's quarter. Obviously the sale of the merchant card servicing portfolio helped this quarter's number. However, you've got to remember that last year's quarter was one of our best as we benefited from a very strong refinancing boom as I previously mentioned. Our service charges and other deposit fees were up 12% from the previous quarter and 4% over the same quarter last year. These were some good numbers for us and highlight the fact that we continue to grow our deposit base which leads to higher fee income revenue. Our efficiency ratio increased this quarter to 59%, versus last year's 53%. Nearly all of the increase was attributable to the expense associated with the maintenance and disposition of Other Real Estate Owned property. Although we did also have a slight reduction in revenue over last year's quarter, but that was just insignificant compared to the increase we experienced in OREO. With that said, the banks continue to do a stellar job of controlling those expenses both operational as well as funding that are under their direct oversight.

So over all we saw some signs of improvement in credit quality, although, again, there's more work to be done. We don't hold out much hope that we'll produce any growth in our loan portfolio this year, hopefully we can keep the decrease to the current run rate of about minus 5%. We have made great progress the past year, however, in transforming the composition of our balance sheet to one less reliant on borrowed funds. Our loan to deposit ratio has gone from 122% in June of last year to 89% this year. After the events of the past three years, this more stable funding base should serve us well going forward. Finally our capital levels continue to be among the highest in the industry, now hopefully we will start to see some opportunities to deploy this capital in ways to further increase shareholder value. In summation, we are still not satisfied with our earnings performance, but here again we're starting to see some positive things develop. We need to continue to build on these positives as we move through the second half of the year. And that ends my comments and we will now open it up for questions.

(Operator Instructions) We'll take our first question from the line of Mike Zaremski, please go ahead, sir.

Hi, guys.

Hi, Mike.

Okay. So I was a little surprised with the deposit growth. Can you give us some color on I guess your deposit and funding strategy especially in the interest bearing. I think some of it was CDRs can you touch on that where that came from.

Yes, I mean, what I highlighted in my remarks was just retail deposit growth. Obviously if you look at the balance sheet you'll see a higher level of deposit growth that we experience during the quarter as we moved away from other borrowing sources to more brokered deposit type funding. And the reason we did it is as we've always done, Mike, it was just a cheaper funding source. I mean, we are constantly out there looking for the most efficient and the best way to fund the balance sheet and recently we have found that brokered deposits are much less expensive even considering the insurance that you have -- the FDIC insurance cost associated with them, that they're far less expensive and more attractive than other wholesale borrowing mechanisms. So we have been shifting that -- and you saw a lot of that shift this quarter where a lot of our traditional borrowed funds were paid down and replaced with brokered deposits. It's strictly, for us, we're indifferent to really the type of wholesale -- I mean because we consider brokered deposit just wholesale funding any way, so we're indifferent to where we get the funds, we just want the best and most attractive rate.

So is this a trend that can continue, it looks like it would be a positive if it could? Or should it slow?

Well on the retail side, those are some good numbers, especially, I mean, if we could continue to grow our noninterest bearing deposits by 11%, I mean, we would be ecstatic with that. And the same held true, we had about 6% growth in retail deposits. Can it continue, that Mike seems to be the million dollar question. I know there's a lot of print out there, a lot of stories being written regarding, well what happens when the economy kicks back in, do we see a lot of this deposit -- or these deposit dollars flow off the balance sheet and back into other opportunities or other options. I don't know. I mean, I do believe, though, that our continued focus on DDA and noninterest bearing, I mean, it's been our experience over many, many years that those are a more stable funding base and if we bring in more and more and more customers which we're doing right now, that should just make that funding source that much more stable. On the brokered side, it's every month. If brokered CDs start to move out of the level of being real attractive, then we'll reconsider moving back in to other wholesale funding and wholesale borrowing mechanisms. So, the wholesale side, we're, again, we're really indifferent to what we're doing. It's usually looking for the absolute all-in cheapest funding source.

I'll slip one more in. Should we expect a down tick in deposit fees up the back of overdraft in the common quarter too?

Well, we're hoping not. We're having good success with opting in. We're working that very, very hard right now.

Are you willing to include any numbers in the good success, 7 out of 10 or anything like that?

Yes, some of the -- one of the issues we have is just getting in touch with all the people and that's the process that has really escalated we have really stepped that up over the last two weeks and we've still got a couple more weeks obviously till the 15th, 16th of August to get that done. But the key with us is of those people that opted in, I mean, they're running well above 80%, 85%. So we've got -- with us, really we're in small communities. We're in small markets. We somewhat have maybe a little bit more of an advantage with the 11 banks knowing their customer base as well as they know their customer base. Be able to get on the phone and talk to these people, I think it's probably -- it's easier for us to do that and that's the process that's taking place right now. Now, is any of this good? Well, of course not. Do we all wish that we wouldn't have to be doing this, of course. But we like so far the response and the success we've had and we don't expect it to have a material impact to our fee income.

Okay. Finally just to be clear, the Durbin Amendment in terms of interchange fees, does that not effect your debit card fees? Or should I be thinking of that as well in the regulatory front.

No, it really doesn't at this point.

Thank you very much.

Okay .

Thank you. We'll take our next question from the line of David King. Please go ahead.

Hey, good morning guys.

Hi Dave.

Maybe to follow up on Mike's first questions a bit. Even with the run off and FHLB advances, it seems like it's got a good amount of excess liquidity, hence the serious growth. Why the decision to bulk up on the wholesale deposits? Or I guess another way of asking, how much excess liquidity do you think you have at this point.

We've got a fair amount of liquidity, but Dave, with the yield curve still being relatively steep there still is opportunities for us to deploy that liquidity although as I mentioned in my comments we're not going -- and we have not. We have resisted, resisted, resisted any temptation to extend and chase yields, but still there is from a liquidity perspective there is an opportunity to take that liquidity and make a spread on it even by maintaining a very, very short duration on those investments. So in this particular stage of the rate cycle, and we look at it all the time Dave. We've got two options, we can continue to deploy that liquidity even though the spread is not great or we can shrink the balance sheet and just pay down borrowings. Right now there is spread to be made and that's been the strategy and our philosophy over the last six to nine months.

Fair enough. And then when you talk about some of the success you had selling problem loans in OREO this quarter, it looks like it led to some marks and those marks may have made an elevator going forward.

Yes, I mean the marks, although I think they're well within our level of expectation. I mean, I don't think that the marks we took this quarter were outside of the range that we were expecting. In fact if anything we've had a couple of pleasant surprises when it comes to marking these assets, however, the key is we just really stepped it up this last quarter. We started to see some real opportunities to move some assets in the first quarter something we hadn't seen all of last year and definitely didn't see in 2008. Then part of it as we said this last quarter, part of it was our own internal decision to hold on to some of those assets last year and wait for a better environment I really believe that environment is here. It's not great, don't get me wrong. You're still taking marks and you're still taking discounts.

Some of the stuff that we put in to OREO a year ago as you can see from our numbers this year, we're still taking pretty significant marks on some of that stuff. The newer stuff going in, obviously you have a much better handle of what the value is there. You're not taking anywhere near the same level of marks as stuff that was put in maybe a year ago. So I think the key though was that we just had opportunities to sell and to dispose of more product this last quarter and that led to the definitely the higher dollar amount. But, again, did we put everything into OREO at the exact price we were able to sell it? No, not in the least. And, again, most of the bigger marks that we took were stuff that has been sitting in OREO for a longer period of time and had more aging on it. I do believe that the stuff that moves into OREO recently, the marks haven't been anywhere near as great. Barry, do you have anything to add to that?

No, we were pleasantly, pleased, I guess with the amount of discounts that we've taken on selling the OREO. To kind of repeat what Mick said, is in 2007 and what we said last quarter, that there were no offers, 2008 was bottom feeders, 2009 we went from no offers to low offers in the first half of this year. We're starting to see some reasonable offers on some of this real estate. I don't know if the budgeting process on a lot of these equity investment firms or these firms that are looking at purchasing these assets came into play. But at least the offers are reasonable this year and we've availed ourselves to some of those.

Pretty encouraging. Very helpful guys thanks.

Thanks Dave.

Thank you and we'll take our next question from the line of Matthew Clark. Please go ahead your line is open.

Thank you. Good morning guys.

Hi, Matthew.

As an extension to that question, can you give us a better sense for where your nonperformers or NPLs might be marked right now. Then in terms of the OREO that you did sell, can you give us a sense for how many cents on the dollar you may have gotten based on where they were valued when they went into OREO.

Well, on the second part of that question -- I'll let Barry address the first part. But on the second part of the question, I'd say that right now the marks that we're taking on that OREO is probably on average somewhere around 30%. And, again, as I said earlier, Matthew, I would suggest that stuff flowing into OREO over the last couple months and then sold right out, those marks may be in the 5%, 10%, 15% range where some of the stuff that was booked in to OREO a year or longer ago and now are just really getting aggressive or the opportunity to sell that project has arisen. Some of those are probably as much as 40% to 50% I mean, we don't -- it's probably something we should do, we just don't track each and every one of them and what it was going in and what we sold it out. I mean, we know on a deal by deal basis, we just don't accumulate all that data into one number, but, I guess the answer to the second part of your question somewhat of a gut feel, but just from seeing all the transactions and knowing what they got sold at, I'd say that 30% range is probably close.

Yes, I agree. It's running about 20% to 30%. In regards to the first part of your question our impaired loans are $217 million. Right now our valuation allowance on those is $15 million. That's what we've reserved as far as our allowance for loan and lease losses.

Okay. So obviously as a portion of that $217 million was in to OREO there could be, I guess, knowing that those nonperformers have been in the high just under 200 for a few quarters here you might see similar marks for few quarters here. Is that fair?

I would say maybe not to the -- it will be close, but maybe a little less given what we're seeing in the markets --

Okay. Okay. Great. And then on the delinquency front nice move down again here. Just curious as to what's driving that improvement and where you might be seeing in terms of product and geography.

Well, with the improvement especially this quarter Matthew, you've always got to, in the back of your mind, be thinking that seasonality has something to do with that. Markets throughout especially tourists markets in that clearly the six months in the middle of any given year are always strong. Employment is better in those markets, seasonal people are working and I think that's an opportunity to reduce early stage delinquencies. But at the same time, I think one of the things that we see is that if there's -- and this may sound somewhat strange, if there's a benefit to not having a lot of loan growth is you still have a lot of lenders who are not doing the volume they may have been doing a couple years ago and do have the time to stay on top of their portfolio, stay on top of their collection activity.

I think this is one of the things that Barry, and Dawn and the senior credit officers have really been pounding on their staffs to do. I mean, if you're not going to make a lot of loans let's do everything we can to keep collecting those that are out there. So, I think it's a combination of both of those things right now that's led to these better numbers. What's going to happen as we move into the winter, could those back up some, that's a possibility, but, I mean, this is a real focus of ours right now because as I said in my remarks, I mean, I think we all believe if we can keep those early stage delinquencies down it's going to give us a much better shot at more quickly reducing NPAs or at a minimum not having as many credits flow into 90 plus day status. Barry, do you have anything to add?

Yes, it's just kind of a matter of numbers too when you transfer $46 million into OREO, that cures a lot of delinquency right there. Then you chargeoff another $20 million. So we're looking at $66 million that basically was transferred out of the numbers that does help.

Yep.

It's just the pure metrics works out that way.

Okay. Then lastly in terms of your TDRs that still might be accruing but they're not included in non accrual, do you have that number this quarter?

It's a little over $15 million.

Yes, it's $16.3 million is the number.

Okay. So somewhat just over $16 million, you said? Okay.

Yes.

Okay. Thank you.

Thank you and we'll take our next question from the line of Jeff Rulis, please go ahead.

Good morning.

Hi, Jeff.

I guess this is in same vein of clearing out some of the OREO but Micky talked about getting into some auctions in the quarter, I wanted to check on how that experience went for you I guess if more were planned in the future.

Yes, I mean, we ran two auctions during the quarter, I've been telling everyone that we've talked to that the results were mixed. It was really determined upon the type of product you put in. We learned some things from these two auctions which I think is going to be good because we do have another one planned this quarter. I think that when you're looking at commercial real estate income producing property, I think the marks are very good, at least they were with the auction that we ran with income producing property. I think the marks were pretty good on just your normal run of the mill subdivision type lots. But when you got into higher end resort type lots, it was not very good.

And I think that's something that obviously we didn't do a lot of it, but I think we learned that going forward on these high end resort type lots maybe the auction is not the way to go and so I've been categorizing it as mixed. It was not a disaster, obviously if it was we wouldn't be doing another one. Did it come out as well as we had hoped, no. And that was somewhat disappointing, but it wasn't disappointing to the point where we have just said that's it no more of them. I think we've tailored the next auction to the kind of property that we think stands a better chance of getting marked properly and getting sold at a better price this quarter. We're looking forward to that one and seeing just where we're at.

Okay. Thanks for the info. I guess on the margin side, a number of moving pieces with the capital raise and growing the securities portfolio and then your comments about not stretching for yield, I guess, where do you see the base settling in at? I mean, the long term average between 4.25 and 4.50, I guess in the near term you're given some of the lack of loan growth. Do you see that dipping below. From more of a long term perspective.

It could. Long term it could. Now I would hope that over the next quarter we don't see it drop below 4.25. I can't emphasize enough to everyone on the phone that we are just not -- this is, in our minds this is not the time to be going out there and stretching for yield. I mean we talk about this all the time Jeff and two bad things will happen. Number one, if we're wrong and rates start to move against you, number one, the more extension you put on when you went out and chased yield, obviously the more of that price of that investment is going to get crushed, so that's number one. Number two, the collateral value of that security is going to move down because of the price being crushed. So you're going to have less collateral. We're just not willing to take those risks. I mean, we understand, believe me we understand that staying as short as we are has definitely had a negative impact on the margin. And we're not going to chase and we're not going to make a lot of loans that clearly don't make sense.

But, that's not even so much the issue on the loan side. The issue is there's just not a lot of demand out there right now. So, I mean, you can't squeeze blood from a turnip and we just don't have a tremendous amount of loan demand, virtually no loan demand, there is some, but nothing to the amount that would allow the loan portfolio to actually show growth. But for us to go out there right now and chase yield, it's just not something we're going to do. We're not going to take that kind of liquidity or interest rate risk as I said earlier, so short term, we just may have to feel some more pain when it comes to the margin, but I think ultimately in the long run that will be one of the best decisions that we will have made.

Okay. This is the last question on that front. You discussed the mix of the earning assets side but the decision in this was sort of alluded to before. The decision to continue to grow deposits in the face of what looks like not a ton of loan growth. Could you clarify sort of the decision there.

Obviously we grow all the retail loans -- I mean all the retail deposits we can because then if we choose or if we don't have -- I mean, if we decide to pay down borrowings or if we decide to lighten up on brokered deposits we can do that. The thing that we are constantly putting the pedal to the metal on is retail deposit growth. Now, ideally, Jeff, we'd like it to come in the form of noninterest bearing deposits. But, we feel that every one of our banks have truly priced their interest bearing deposits at attractive levels so the more of that we can get in at the levels that they're paying, we're willing to take all that we can get. In some cases some of the longer dated deposits -- in this rate environment you're just not seeing many individuals willing to go out longer than a year. I mean you can -- unless you're going to do something irrational. You're not going to get much in the way of deposits outside of one year maturities. We think that we priced these properly that if customers are willing to accept those, we're willing to take all we can get. If we get more than what we need, we just continue to pay down FHLB borrowings, pay down brokered CDs.

Okay. Thanks Mick, for the color,.

You bet.

Thank you. It looks like we have one last question from the line of Brett Rabatin, please go ahead.

Good morning, wanted to ask, Mick, in the past you've given a number on, kind of a classified number in the Land A and D portfolios, that's been kind of the piece of the construction book that's caused you more issues, that portfolio continues to atrophy, can you provide any color on how you see the underlying trends of that $200 million portfolio.

It's a little under $200 million now. We dropped in the quarter, again, based on like what Barry said, based on chargeoffs primarily. I mean that number does continue to drop. But out of the $197 million that's out there we were given some color, Brett, as to how much we thought when that number was closer to $300 million back then we were giving color that we thought there was about $110 million that was stressed. Well, I'm here to tell everybody that we were wrong. That number was probably greater than that back then because we have already moved some in and moved it back out, so it's fluid. That number is fluid.

When we were making those statements, our $110 million figure was probably understated and we just didn't realize the depth and the scope of this downturn in land development. But with that said now, of the $197 million, we would be throwing out a guess. I don't know. I mean, you've got $197 million left in land development. We've got roughly $86 million that is NPA. As that balance keeps coming down, Brett, there's less and less and less chance that we have not already recognized or identified something. Now, is there still a few that are showing up in that 30 to 89 day figure that are not NPAs that are land development loans, very few. So I guess if you want to proxy for what I guess you could take, let's say $90 million to $100 million still. We know that $86 million is nonperforming, throw in another $14 million, $15 million and say of the roughly $200 million that's there, there's $100 million that's still stressed. Barry?

When you look at that portfolio, when you use the word "stress" anybody that has land and acquisition and development loan is stressed. They aren't selling a lot of lots. Again the $84 million is hard core nonperforming we're probably in some kind of liquidation or foreclosure action on that. There's probably another third of that portfolio that if things don't start happening to move here in the next six months to a year we will be looking at some kind of foreclosure or collection action there too. It's just at a certain point. We've been in the cycle now since -- for three years, over three years when you have some of these properties that just are not selling asset, or selling lots or property in that amount of time, some of these guarantors just can't hang on for ever. There's still a pretty good portion of it that we're working on, there will still be more to come. But at the end of the day we feel it's finally down to a level $197 million is the level that we can work with, so and work out of given hopefully some kind of moderation to this real estate market.

So, I guess based on what Barry just said and I agree with him 100%. Let's say that you've got roughly $110 million right now in that land development portfolio that is not showing up as in NPAs right now and if we attribute that -- let's be very conservative. Let's say that 30% more of that could roll in. You're basically talking about another $33 million. To be conservative and to make sure that everybody on the call understands maybe NPAs could go all the way up to somewhere in that $115 million range out of the $197 million, if things just continued to just go nowhere and lots just continued to have no sales, no real interest. I guess that would probably -- because I think we could probably identify an additional $70 million or so that aren't just not going to probably get to that stage. I mean, the guarantors, the resources are very strong and just don't see us getting that back. But, again, to be fully disclosing how bad under the worse scenario it could get, yes, I guess there could be another $30 million, $33 million that move. We hope not, but that would be the -- I would say that would be the top end.

Okay. That's really good color Mick. The other thing I wanted to ask is, obviously your loan generation is not strong but your deposit generation is. I wanted to hear some color about this M&A and if you think open bank transactions how far those might be away for your markets and if that might be maybe in 2011 more of the way you go as opposed to FDIC transactions or just your thoughts generally on -- you got excess capital to deploy, do you feel pretty good you might have some chances to do that?

Yes. I don't see it happening this year, I still don't. I don't see the regulatory environmentally really allowing much of that. Obviously as you all know, we thought there was going to be some opportunities, there still may be on the FDIC front. But a couple of those opportunities now that we were seriously looking at, not sure whether they're going to transpire. That's something you really can't count on. What we could count on and what we hope in year 2000 -- mid 2011 time frame I think is -- that's the time frame that could work. That going back to the normal M&A type of transaction, we still believe that our system, our model is very, very attractive in that whole bank M&A environment and we still may be out another year before you see a lot of those deals, but we think that when that environment changes and when we start to get a little different regulatory environment, one that probably is going to open up to more of these open M&A deals, we just really like our chances.

I mean, we really like the fact that those are transactions that we can go out and solicit and negotiate not necessarily having to do a bid situation like you have to do with FDIC and then even if you are lucky enough to have an FDIC transaction offered to you. So, we're probably -- what we talked about all the time, Brett, we probably are looking at this time next year before we really see that open M&A market really start to come around. When it does, we think that's going to be -- getting back to one of your other questions, yes, that's probably going to be our best opportunity to deploy capital because I think that internal organic loan growth is still a ways out.

Okay. Great. And this is one quick follow up. Do you hear -- do you get calls from healthy banks today, is there anything happening in that area or is that completely dead at this point in terms of talk?

Not so much. We really don't. We just don't. I don't know whether it's -- obviously us knowing the environment and knowing that there's just not much of this type of activity taking place. We're not spending a lot of time right now out there kicking tires. But, I still believe that and my big question, Mark even a year from now is going to be how reasonable and rational are sellers with their price expectation because you would hope that they would understand the level of where prices have moved down to. If they don't, you're not going to probably -- then I'm going to be wrong, you're not going to see as much from these healthy banks. That's clearly what we would be interested in. I mean, we would be interested in and we continually have got a list of what we think are very, very good healthy banks that have great management that down the road we'd like to see part of this Company.

Okay. That's very good color. Thank you.

Thank you, and we did have one more question from Jennifer Demba, please go ahead.

Thank you. I'm sorry jumped on late. Mick, you were talking before about the land development portfolio, can you give us a sense of what kind of average loss you've seen in the problem loans you've had in that category to date? I'm sure it's ranged and been all over the board, but?

Yes, that one probably somewhere in that 30%, 40%, would you say, Barry? 30% to 40% range is the losses we've taken, Jennifer on that one.

Yes.

In that piece.

Yes, Jennifer, that would be write downs to the allowance and then loss on sale once into OREO, would be a combination of 30% to 40%. Some properties, we've been high as 80% other ones we've been in that 5% to 10%, but on average it's been 30% to 40%.

Why has it been so much better in some of those of 5% to 10%?

Some of it is location, obviously. I mean land -- we sold a land development loan in the [Boise] market and that's the one Barry alluded to and I think we got about $0.20 on the dollar when it was all said and done. We've had some that we've taken 5%, 10% hits on and part of it is just -- a lot of it's the geography and the location, part of it is the subdivision itself just -- it's amazing, what value is in the eye of the beholder and some people come into these things and they see something that somebody else doesn't and they're willing to pay up for it.

Where we've seen the 5% to 10% discounts are those buyers that are not -- that are going to use it personally, the property personally rather than continue to use it as a subdivision or development either and they're adding on to their existing properties or they want their own little chunk of property in one of our marketplaces so the amenity value is what you're paying for not so much economic value as a subdivision. Where in the Boise market, there's lots down there where there's just a huge inventory of lots and at the end of the day we took some huge -- very deep discounts on a couple of those subdivisions down there. So but and -- unfortunately we don't have a huge amount of --

That's what I was just going to say.

-- subdivisions in the Boise market where some of our other markets we do. Generally across the board it's been 30% to 40%.

On the land development piece, Jenn.

Yes, just to kind of give you an idea overall while we're sitting here talking, I looked at - we've sold about $31 million in OREO this past six months and the loss on sale was about $4.2 million. Now that doesn't include write downs previous to sale. But just for the properties that we were carrying on our books, so that's not a bad mark but, yes, that's one number we'll probably need to follow up on.

Start to follow more, yes.

A little closer.

Now that we're getting actually some opportunities to move some properties.

Thank you very much.

You bet.

We have no more questions at this time.

Okay. Well, thank you all very much for joining us this morning. Have a great weekend and we'll talk to you all later.

This does conclude today's conference. You may disconnect at this time.