Glacier Bancorp Inc (GBCI) 2010 Q4 法說會逐字稿

Good day everyone and welcome to today's earnings call. At this time all participants are in a listen only mode. Please note this call may be recorded. I will be standing by if you should need any assistance. Now it is my pleasure to turn the conference over to Mr. Michael Blodnick. Please go ahead Sir.

Thank you John.

Thank you.

Welcome, and thank you for joining us this morning. With me this morning is Ron Copher, our Chief Financial Officer, Don Cherry, our Chief Administrative Officer, Barry Johnston, our Chief Credit Officer, and Angela Dose our Principal Accounting Officer.

Last night, we reported earnings for the fourth quarter of 2010. Earnings for the quarter were $9,593,000 compared to $9,474,000 in last year's quarter. A small increase of $119,000 or 1%. Diluted earnings per share for the quarter were $0.13 this compares to $0.15 in the prior year's quarter which is a 13% decrease. Excluding gains on the sale of investments, net of taxes during the quarter of $0.02, our core operating earnings were $0.11. The investment gain came primarily from the sale of a number of Z- tranche mortgage backed securities that were not earning us a yield and yet offered an opportunity to sell them at an attractive premium. Earnings for the year were $42,330,000 versus $34,374,000, that's an increase of $8 million or 23%. And on a diluted earnings per share basis for the year, we were at 61%. That's up from 56% last year or a 9% increase. Our ROA for the quarter was 0.58% and our return on equity was 4.47%. For the year, we generated an ROA of 0.67% and an ROE of 5.18%.

From an earnings perspective, 2010 showed some progress over last year, but still was far below our expectations. We need to get back to the type of performance we maintained for many years. After two lackluster years, and while still facing a number of headwinds and uncertainties, we believe we can and will deliver better earnings in 2011. Although our earnings for the quarter and year were not close to what we had hoped for, there was some underlying strength in our overall performance.

The core earnings of the Company produced, although down from -- the core earnings produced by the Company, although down from 2009, are still strong. And allows us the ability to work through our problem assets while maintaining all time high capital levels. Total assets for the year grew at 9%. Primarily due to a significant increase in our investment portfolio during the year, and especially during the fourth quarter. With scarce loan demand and a 7% reduction in gross loans during the year, we found it necessarily to deploy the excess liquidity that kept building on our balance sheet. This, however, is not without its consequences. As we continue to purchase very short duration agency mortgage backed securities, at very low yields, it compressed our net interest margin. In addition, with rates lingering at historically low levels, prepayment speeds on much of this portfolio sped up significantly, especially in the last quarter of the year.

As a result, we had a wave of cash flow at higher yields come back to us that had to be reinvested at these lower yields. Again this past quarter, we have resisted the temptation to extend the maturities on our CMO portfolio. We understand the pressure this is putting on our interest income and our net interest margin. Nonetheless, although we are committed to leveraging the balance sheet when possible, we remain unwilling to invest in longer dated securities just to increase the yield on our investments.

2010 was another good year for deposit growth. Non interest bearing deposits grew 6% for the year, although we did see a seasonal drop-off in the fourth quarter. Again this past year, we again posted nice additions, to both personal and business checking accounts. Total number of checking accounts increased by 9% this past year, a very good number. And it firms our commitment to grow our checking accounts base. Our interest-bearing deposits grew 11% for the year. This growth in deposits allowed us to lower our dependence on other funding sources and yet still provide sufficient funds to grow our asset base.

In 2010, through a secondary offering done in March, our capital ratios increased to historically high levels. Although certain opportunities to deploy this capital did not materialize, as we had hoped. We remain patient and expect these high capital levels to give us the capacity to further grow our balance sheet over the next couple of years, to what we believe could be some very attractive opportunities. Our tangible common equity ratio ended the quarter at 10.32% versus 8.72% in last year's fourth quarter. Tangible stockholder equity in dollars increased by $155 million. We continue to believe that tangible common equity is the highest form of capital, and this amount of tangible on equity has served us well during these difficult times. In addition all regulatory capital levels, all ended the year at all-time highs. NPAs grew by 3% both during the quarter and for the year. This was not unexpected, but still disappointing. Write-downs and charge-offs totaled $24.5 million but unfortunately, because of a very early and prolonged winter, sales topped off appreciably in the fourth quarter. And we don't expect that to change much in the near term. It will probably be April before we see any real pickup in activity.

Although NPAs were higher at year-end, we are starting to see a few positive signs on the credit front. For example, all the increase in NPAs this past quarter was in OREO. Hopefully at this stage of the credit cycle, our valuation of this component has anticipated and assessed the majority of the loss. So, if we have renewed demand the selling season, these credits can more easily be sold. We continue to decrease those portions of the portfolio that have cost us the most heartburn. As the banks continue to work through these credit issues, the overall dollars in these loan categories have decreased significantly.

For example, during 2010, our residential construction portfolio decreased from $210 million to a $109 million, with spec construction down to $68 million of that total. Land development loans, have gone from $229 million in 2009 to $173 million at year-end, of which $84 million has already been identified as non performing. And finally, our 30 to 89 day early stage delinquencies continue to run about half of where they were last year at this time. At $45 million, they increased $4 million for the quarter but decreased from $87 million compared to the same period last year. We think we are finally at an inflection point in regards to our credit quality. If this year's sales activity is as good, or hopefully even a little better than last year's, we believe we are in a position to make good progress in reducing our problem assets. NPAs of $270 million represent 3.91% of assets compared to 4.03% the prior quarter and 4.13% a year ago. Commercial real estate accounted for $4 million of this quarter's increase. Yet on a percentage basis, only 3.3% of our commercial real estate portfolio is non performing, compared to 49% of our land development loans.

Net charge-offs, again for the quarter, were $24.5 million. And for the year, we had net charge-offs of $90.5 million or 2.4% of total loans. This compares to 1.4% in 2009. Needless to say, we did not plan on having this level of charge-offs this year. Unfortunately, real estate prices for developed land continue to fall, especially in parts of Idaho and western Montana. In the near term, as we continue aggressively working through these problem assets, we expect net charge-offs to remain elevated but not at the levels we experienced in 2010. Our ALLL ended the year at an all-time high of 3.58% as compared to 3.37% last quarter and 3.46% at the end of 2009. We've provisioned $27 million to the ALLL in the fourth quarter, that's down compared to $37 million in the same quarter last year. But an increase of $8 million over the prior quarter's $19 million. In the quarter, we recovered our net -- we covered our net charge-offs 1.1 times. For the year, we provisioned $85 million to the loan loss reserve. Based on our analysis, we believe the ALLL at its current level is adequate.

One area that has been a challenge for us, all year, has been our net interest margin. For seven consecutive quarters, we have seen margin compression. We had hoped to hold our net interest margin at 4% through year end. However, a combination of much larger, low yielding investment portfolio, shrinking loan portfolio, and a significant increase in premium amortization, which alone accounted for 28 basis points -- or a 28 basis point reduction. The net interest margin decreased by 28 basis points on a link quarter basis. Our net interest margin for the fourth quarter was 3.91%, down from 4.19% the previous quarter. The main culprit this quarter, again was the premium amortization. Although continued decrease to our loan volume and a high level of non accrual loans have also presented challenges in maintaining our net interest margin.

As the finance wave slows down, and works its way through the system, we would expect some relief in the amount of premium amortization we have booked going forward. For the year, our net interest margin average 4.21% versus 4.82% in 2009. Our expectations going into the year was for a lower margin. However, the refinance boom at the end of the year and subsequent huge increase in premium amortization were not anticipated. Although we didn't expect compression to our margin to the magnitude we saw this past year, with the interest rate environment probably not poised to change much in the near term, some further reduction is possible. The only thing that will restore and get our net interest margin moving upward again is stronger loan demand. There is very little additional relief on the funding side.

The banks did a nice job this quarter of generating fee income, especially in the area of mortgage originations. Total non-interest income increased $2 million for the quarter or 8% sequentially. For the year, non interest income was up $1.1 million or 1%, as higher service charge fee income and gain on sale of loans drove our performance higher. Our non interest expenses the quarter decreased by $6.3 million. This was primarily due to a drop in OREO expense. We took some large write-downs of OREO in the third quarter which were absent this quarter. For the year however, our non interest expenses increased $19.1 million with $13.1 million of that figure due to an increase in OREO expense. As we enter the third quarter of this down credit cycle, the values we are carrying, both in our OREO assets as well as other non performing assets, are much lower. And it would seem reasonable that the disposition of these troubled assets in the future would not require additional significant charge-offs or write-downs to dispose of them. Excluding OREO, I thought our banks did a nice job of controlling all the other operating expenses under their control.

In closing, it's been a challenging two years, and their is still a number of hurdles to overcome in 2011. Although we would expect credit costs to decrease this year, there will be added pressure on fee income and the margin that will be difficult to offset through just cost reduction and greater productivity. Nonetheless, our balance sheet is as strong as ever. We continue to generate a larger and larger customer base to sell more and more products and services to, and we have a great deal of talent inside this Company that always seem to find ways to get things done. We sense that the worst is behind us, and we can again start to move the company forward in a profitable and prosperous direction. Those are my comments on the quarter, we will now open the lines of for questions.

John, if you want to do that.

Absolutely.

Absolutely.

(Operator Instructions).

And we will take our first question from Mike Zaremski. Please go ahead, sir.

Hi, everybody.

Hi Mike.

Could we get a little more color on your NIM outlook? I guess, just thinking through -- through everything there -- the yields did jump a decent amount this quarter. Your security yield is down to 25 now. You are alluding to not being able to -- not willing to kind of keep that reinvestment rates. And then it seems like you do have some CD downward repricing as well. I guess, what do you are guys thinking, if loans don't grow in the coming quarters?

Mike, if loans don't grow, I think that most of -- or a big percentage of the damage to our net interest margins has been done. We've had, like you said, seven consecutive quarters of contraction. I don't believe we would have seen anywhere near the level of contraction this last quarter, if it wasn't for the huge amount of premium amortization that we experienced. That's going to slow down. I mean the refinance boom or boomlet, whatever you want to call it, that we have seen over the last four to five months is quickly working it's way through the system. So there should be some relief there.

And I guess our projections are that loan growth will not be -- or the lack of loan growth will not be as large and significant as it was this past year. Again, there is some still. You're right, Mike, there is still some CDs out there that obviously can still price lower. And we are constantly talking with our banks about actively and aggressively managing their funding base. But as you can see over the last year, we got hammered a lot more by a reduction in interest income, that was not able to be offset by interest expense. Quite the opposite of what we saw the prior year, when we were really taking advantage of rates moving down, and we were actively and aggressively staying on top of that.

So, I guess the answer, Mike, would be that, yes, there still could be some further pressure. Again, as I said last quarter on this call, I just wish I knew how long we were going to stay in this rate environment, because the longer we stay down here, clearly the more difficult it is to support that margin. And the bottom line, we need to have more loan growth. That is really the only thing in my mind that is going to start to turn this thing around.

So then, Mick, following up on loan growth then. The pace of decline picked up this quarter. Real estate was a big decliner as well. What drove that this quarter? Any special factors, and when do you think we will start to see stabilization? Do you think by year-end?

One of the issues that drove it, was a reduction in warehouse lending. I mean, obviously, we -- just the volume of that business. And the fact that when rates started -- rates kept moving down earlier in -- especially earlier in the quarter, that was part of it. The other part is we continue to have charge downs on the loan portfolio. Clearly some of those don't hurt us as bad because those are non-accrual loans to begin with. So, but it's more so just the new demand, Mike. You just don't see a lot of it. And again, if we went back ten years, historically the fourth-quarter and the first-quarter are going to be slow quarters for us anyway. So if you don't have a lot of new loans coming on, which historically we have not had during the last quarter of the year, and then you've got these additional barriers being -- a reduction in warehouse lending, a reduction in some of the troubled assets, it's -- it made for a much much bigger reduction in the fourth-quarter. We were running in the high 4% annualized through the first three quarters. And as I stated, we ended up over 7% for the year. So you can see that that last quarter hit us hard.

Mick, can you remind us the mortgage warehouse lending balance? And thanks for taking my questions.

You bet. I don't -- let's see -- do you have that?

I can follow up with Ron.

Yes, I don't have that right in front of me -- well, yes, I do. Loans held for sale at of December 31st were $76.213 million That compares to $66.330 million the prior year, but my guess is, if we were looking at September's number, and maybe [Ann] can get it. It was a much -- September's number was much much larger than the prior -- it was in the final quarter.

Thanks for the color.

You bet, I can get you that -- we can get you that number. I don't have it in front of me, Mike.

No problem

I can get it before the end of the call

Thanks.

And we'll take our next question from Jeff Rulis. Please go ahead.

Good morning, guys.

Hi, Jeff.

Mick, I wanted to -- I guess just trying to get a sense for the OREO expense going forward. You had a nice decline this quarter, despite an increase in OREO balance. I guess couching that versus your comments about sort of having a catch-up in Q3 on write-downs there. I mean, is this sustainable? If could you offer any additional detail on your expectations for that line item -- the expense line item?

Well, for the year I think, as I mentioned earlier, we had about a $19 million in OREO expense more than what we had the prior year. It was a huge increase for us. We did move about a little over -- or right around $10 million more into OREO during the fourth-quarter. And what we are thinking here, Jeff, is that a lot of these credits now that we've and battling with and struggling with, have been out there for a couple of years. They probably gone through at least two appraisal cycles, because obviously we are getting those reappraised if we still have them. Or if we haven't disposed of them, we are getting appraisals, even if they are not in OREO at the time. We are continually reappraising them every year. And so a lot of these credits have gone through two of those appraisals cycles, and moved lower and lower.

Of course, when any of these go into OREO, as you well know, they are valued again. Their valuation is done again on them. And at this stage, we are thinking that where the market is, and where some of these are moving into OREO are at some very low levels. I know that, just overall in the portfolio, Barry has done some analysis, as to from kind of cradle-to-grave on some of these problem assets, because it has come up in prior quarters, how much have we actually lost in some of these, especially in the land development area. And it's -- obviously, it's different from location to location, state to state. But I mean, you take land development, which still is a big chunk of our OREO, and from cradle-to-grave we have seen across the Company about a 43% reduction, or a loss, in value from what we originated that loan for compared to -- And, Barry, is that where it's at right now in the book -- where we disposed --?

Actually, we took a 43% loss on those loan balances, from the date of origination to the date of either disposal or what we have them valued now. So some banks are higher, some banks are lower. But across the system, if we got back a piece of property, or we are holding a piece of property in non-performing status, on average across the banks, it's been a 43% loss rate, either loan loss, write-down, or loss on sale.

And I guess Jeff, that's what's giving us a little bit of comfort, is at some point in time, we are going to pass through enough reappraisals of these properties. And if values have, which they have, of course, over the last couple of years continued to go down, these credits and this OREO property that is still on our books, continues to get valued lower and lower.

Jeff, I guess the thinking is that in, that this past appraisals cycle and anything of any size we give updated appraisals at least on an impaired loan, or piece of bank-owned property at least annually. And this past year, we've seen some valuations that frankly surprised us a little bit. As noted, our charge-offs were higher than we had anticipated or expected. And this coming year, if the values tend to hold steady, or even if there is some small decline, we are not anticipating that decline will be what we saw in this past cycle. So that's why we are anticipating that we just aren't going to have the amount of OREO expense or charge-offs in this coming year.

Now you might have. If we obviously -- if we could really push a lot of OREO out the door, and a lot more came into OREO, maybe the dollar amount might be the same, but as a percentage of what ran through, it could be far smaller. And I guess that is where we are at.

Right, okay. And Barry, one last follow-up. Do you have inflows into non-performing loans this quarter versus last quarter?

I do not. I have the gross balances, but I can't tell you what came in and what went out.

Okay.

I mean, non-performing loans were basically flat. I mean, they just did not change at all. Again, the move from the 261 to the 270, Jeff, that was all in OREO. But clearly, I mean, as NPAs moved into OREO, some things came in and replaced it. But the balance was no higher --

Yes, actually, NPs went down about $1 million, from 198 to 197. We've never tracked the transition. It's just a headache to try and keep track of what -- we just --

All right, okay. I was just trying to see what -- if the pace of what is coming in, I'm aware that it's flat. But -- okay. I appreciate the commentary. Thanks, guys.

You bet, Jeff.

Next we will go to Jennifer Demba. Please go ahead.

Good morning, everyone. This is David Grayson in for Jennifer. Thanks for taking my questions. First question, real quick -- just kind of a modeling or housekeeping question. What was going on with the tax rate this quarter? You guys booked a small tax benefit against a pre-tax profit.

We did. Ron, do you want to comment on the -- ?

It's a combination of our historic municipal bond portfolio -- the tax exempt bond portfolio, and in particular this quarter we booked additional tax credits, the largest one of which was the historic tax credit that got to the bottom line. And so, that's a one-time item. But as you guys have seen from prior 10Ks, 10-Qs, we do have tax credits which does reduce the effective tax rate.

Okay, so you expect the rate to maybe sort of normalize starting 2011?

Yes.

On a quarterly basis?

Yes.

Okay. Alright, and next question. Mick, some of your comments earlier, when you were recapping 2010, you made reference to how some strategic opportunities that you thought could happen, didn't materialize. But your optimism going forward, was pretty clear in the tone of your voice. So I just wanted to maybe ask you to expand a little bit on your strategic opportunity outlook? And maybe given the pickup in M&A, I guess, kind of sector-wide, if you are seeing maybe an increase in solicitations or incoming pitches, and just what the landscape looks like right now? Thanks.

Okay, well, David, I mean it's not going to change too much from what I mentioned the last two quarters. I don't see anything in the very near term, especially out in this part of the country. What I was referencing with my comments, was that we really had thought that in our footprint we would have seen more FDIC deals, that we would have been able to look at, and hopefully even take advantage of. As I said, that did not materialize. I think now we are probably looking at more traditional M&A type activity. I'm not so sure that you are going to see a whole bunch of it in the early part of 2011.

But I believe that as you move later into the year and into 2012, I really still believe that there is going to be a significant amount of consolidation. And it may not even be so much the FDIC type of consolidation we have seen the last couple of years, but it still could be in a couple of different forms. I think there is still going to be some banks out there, that although they never failed, I think with our capital levels and the lack of access to capital, the fact that they are probably just not going to go anywhere quickly. I think those are going to present some opportunities, if you can get your arms around the asset quality, if you think they have identified all of their issues or problems, I think those would be some opportunities, that would probably be very attractive pricing levels.

But then, as you read and each and everyone of you on the phone have heard 1000 times, I mean we are starting to live it now. I mean, this regulatory environment is changing daily. And I have said this, over and over to our staff and to our Board, I would not probably want to be a $200 million to $300 million to $400 million bank going forward, that has to comply with all of the rules and regulations that banks -- that we are starting to see right now. But we have not seen even a small portion of that burden that is coming down the pike. And I -- and those types of franchises in that asset range, have always been our bread and butter. I mean, they've always been the type of bank that we were attracted to. And yes, there obviously are inquiries, but I'm not here today to say that there is anything imminent . But as I said in my remarks, we are going to be patient, because we really do believe that down the road there are going to be some very very nice opportunities for this Company, and for us to deploy the strength of our balance sheet.

Okay, thanks so much. Thanks for taking my question.

You bet.

And we will go next to the site of David King. Please go ahead.

Thanks, good morning, everyone.

Hi. Dave.

I guess, first off maybe for Ron, and I apologize if I missed this. How much did the premium amortization weigh on the margin this quarter? I guess, either in terms of basis point or dollars?

It was 28 basis points on the quarter.

Okay. So that's -- okay, all right. That's very helpful. And then, I guess, the securities balances were up about 34% sequentially. And I know that some of that came out of cash.But understanding that you don't want to go out on a curve, but can you talk about what you bought, I know it's CMOs -- but what sort of yield are you picking up these days on that kind of stuff?

Well, we are staying with the very short weighted average life of CMO's. They are highly structured. And we are getting -- and just by way of example, say, we are getting 150 basis points. And with our borrowing rate, we are able keep the fair amount of that going through the income statement. Obviously, as Mick explained earlier, the premium amortization had a lot to do with it. And so, we continue to look out, we are certainly aware of the steepening yield curve, but we are not quite ready to go out that far just yet. The good news is, we are getting plenty of cash flow coming off of that investment portfolio. And we can redeploy that to take advantage of opportunities as they might present themselves. Some of the munis, we do buy some of the munis. We have sold some munis that have come into their pre-refunding status, or before the call dates. And so we have some opportunities out there. But we are being very cautious about that opportunity, particularly with the mortgage-backed security, especially the CMO's.

And one other point along that line, Dave, I would like to make, is that we have continued to cull the portfolio too. We have looked, as we hear, and as we read and we analyze certain parts of the country that maybe are undergoing more stress than others, I mean, that's also a part of our strategy is to maybe sell some of those. I mean, the net gain on sale of investments this quarter was a little over -- it was the equivalent of about $0.02 on an after-tax basis. But there was a lot of both gains and losses that were built into that activity. You are seeing the net number. Unfortunately, -- not unfortunately, I guess, but there was a time not that many years ago, where we would buy securities and we would just put them in the portfolio, and not do a lot of buying and selling. We would always analyze them, but we would be more of a -- buy and hold. We took more of a buy and hold approach.Well, part of the problem we've got right now is that a lot of those securities that we bought and held are ten years older, we've had those securities for ten years old. And some of these, it only makes sense to more actively and aggressively manage them, so we can protect some of the gains that we've got in those portfolios.

The other thing I want to mention, because your first question was regarding the premium amortization. It was a 28 basis point impact for this quarter. It was 56 basis points over the same quarter last year. So, I mean, it's just in the last 12 months, it's had a pretty significant impact. But believe me, we fully understand all of the ramifications of this too. And if there is a bank out there that has had like we did this quarter, had a real nice tick up in mortgage origination fees, our mortgage origination fees were up $2 million over the prior quarter. Well, we benefited from that refinance, as many many other banks around the country did. I'm not sure of all the other banks around the country held their investment portfolios as structured. Ours is structured very, very short as Ron said, very tight structures. And we leave ourselves, we've experienced this exact same thing back in -- for some of you on the phone that were following back then -- you will remember that we experienced this exact same phenomena back in 2003 and 2004.

Well, that refinance boom is slowing down, slowing down quite dramatically. So, we are not going to see necessarily the fee income that we saw the last two quarters. But at least with us, that will somewhat -- be offset by a much lower premium amortization. And clearly the premium amortization this quarter was far, far greater than any increase in mortgage origination fee income. So, we are trying to put some balance there, but it was pretty painful this quarter, especially with the level of amortization that we experienced.

That makes sense. That's very helpful. And I guess, just finally on credit, assuming that you are successful in disposing some of these problems as we head out in the spring summer selling season, and all that stuff, how do you think about the overall allowance? It sounds like it may have peaked, so is the plan just to match the level of losses, or might we see some reserve releases possibly, seeing it is the first quarter?

I would think that based on our plan right now, and based on what we have talked about, and Barry and myself have gone through, I would expect that it would be another year of covering losses . If our projections are correct, then the amount of money that we expect at this point in time to provision versus the losses that we would expect, I'd think you would be relatively close to that 1 to 1. Barry, do have any other?

No.I think that's kind of where we are at.

All right. Thanks, a lot, guys.

And we will be going next to Brad Milsaps. Please go ahead, sir.

Hi. Good morning, guys.

Hi, Brad.

Most of my questions on the bond portfolio have been answered. But Ron, just curious, assuming we don't get another spike in refi activity, what sort of cash flow you expect back this year off the investment portfolio as it stands today?

Well, right now were getting about $90 million a month, coming off the portfolio.

Okay. And then, if I know you guys, I'm assuming on the borrowings, you are staying very short. I'm guessing 30 days or less, or is that too short?

Too short, and opportunistically we are taking advantage of where we can extend, and so, but historically, yes, we're short, but not necessarily 30 days.

Okay. Okay, but there is definitely -- I am just kind of trying what -- I am kind of curious, what the mismatch would be there?

You mean as far as the mismatch on the funding side versus what we are purchasing there?

Right, right.

Well, what we are purchasing, and, of course, unfortunately they became way shorter than what we even we'd thought we had purchased because this latest refinance wave, Brad. But we have been trying to stay right in that two-year range. And again, one of the reasons that the premium amortization hit you so hard, is in order to get the type of structure that we want, we have to pay a premium for that. Of course, everything you buy these days in this rate environment, everything you are going to buy is basically at a premium. But we pay even a little bit higher premium, because we do not want that extension risk. And we are very, very cognizant, and that's a real focus of ours.

As a result, when you have these kinds of waves. And you especially know, Brad, we have had this conversation six or seven years ago, when we were experiencing the same phenomenon. These investments that we are making in the form of CMO's, they really shortened up even further than what we expected. And granted, there was no extension risk. The risk we ended up experiencing was that we were getting our cash back way faster --

Right.

-- than what we had thought we were going to. Now I think that will slow down, but even if it slows down, none of the structures we buy are going to extend. And let's say rates start running up, that's the one thing that we have been trying to protect ourselves against. And like Ron said, we've been trying to make sure that we are going to have a lot of cash coming back in an upward rate environment, that these securities will not extend. And so far, that hasn't -- that strategy is just has not benefited us. But when rates to start moving up, we really do believe that we are going to be in a much better position to handle those higher rates.

Right,. And as I look back on my notes, when I covered you guys then, I guess the difference was then, you have a tremendous amount of loan growth that socked up a lot of that liquidity and cash, so that you're getting back, coming out of your decision to lever up. And this time, if that doesn't transpire, do you -- would you make the decision to potentially go ahead and maybe begin shrinking some of the balance sheet, and taking some of that off?

Well, you are absolutely right. There was far more loan growth back then, that somewhat camouflaged some of the other issues of the premium amortization, that's just not taking place right now. I mean if this -- if we truly do continue to see this kind of premium amortization, yes, you are right. At some point in time, you are better off not buying the securities at all, because you're net yield on these tends to be negative. And we will just have to monitor that very, very closely. Because it's not like the spreads that we are purchasing right now are that great to begin with. There are spreads when we are buying this product, but when you experience the kind of premium amortization we saw this quarter, you get whip-sawed

Right, right. And Mick and Ron, you and I've talked at length about the margin versus net interest income, I mean, do think you can support -- even if the margin comes under pressure, is it your sense that can you continue to support the net interest that becomes dollars sort of in this range, or kind of what is your feeling on that?

That is our goal. That is the goal that we have.

Okay, okay. And then just one final question, I'm sorry if I missed this in the release or in your commentary, and just curious what the number of -- the amount of TDRs were at the end of the year?

Do you have that?

Yes, I have that.

While Barry is looking for that, I will make one comment. In one of the earlier questions, I can't remember exactly -- I think maybe it was Mike that asked the question, our warehouse loans at the end of the third quarter were at 115 -- a $115 million, and they ended the year at $76 million. So there was about $39 million, $40 million reduction in warehouse lending in the fourth-quarter. And that's what I was saying earlier. That was part of what led to the reduction in overall loan volume. Barry, you have those numbers?

Yes, Brad, total TDRs were $68.736 million. And of that balance, non-accrual TDRs were $41.952 million, and accruing TDRs were $26.784 million.

Okay, great. I really appreciate it. Thank you.

You bet. Thanks, Brad.

And next we will go to Joe Gladue. Please go ahead.

Yes, I guess I just wanted to touch, I guess follow-up on some of the talk of securities. Is there, I guess, any limit to how big you would grow the securities portfolio, another couple quarters like the fourth-quarter, and I guess the total balance would be approaching parity with loans. Or do you start to do something different?

Yes, Joe, that's just not going to happen. I mean, a couple of things were in play. Our goal for the year was to try to get ahead of what we expected to be -- of what was we thought was going to be a difficult year for loan growth, which it was. Our original plans for 2010 was to have a much higher level of investment purchases earlier in the year. And we really struggled, because we are so particular in the type of structure that we are looking for. It just wasn't available in anywhere near the quantity that we were looking for throughout the first three quarters.

Now as a lot of banks started to, for whatever reasons, pressures or end of year, whatever we saw, much more of that product come available in the fourth-quarter. And so we took advantage of it, but it was more of a catch-up. I mean, we would have loved to have more of that volume on the balance sheet in the first and second quarter of last year, rather than all coming in the fourth. Already now though, year-end is behind us, and as Ron commented, we are now to a point where we have to buy about $90 million every month just to stay in the same place that we started. And we are now into the new year, and we are starting to see some of the same issues that surfaced last year in the first three quarters.

The product is just not out there. So what you are probably going to see is, we built it up. And one of the reasons we built it up, and we took that kind of an increase in our investment portfolios, is we somewhat expected this would happen. That come the first of the year, the opportunity to buy this product was going to probably wane, and that has been the case. And so, you are probably going to see that there could even potentially be some decreases to that investment portfolio.

Getting back to your other question, I mean, at what point in time -- I mean we have been -- historically we have taken that portfolio up to slightly above 40%. We are not too far from that right now. Although like I said, I'm not so sure we're going to be able to hold that same level, at least in the early part of 2011. So part of it, just like Brad asked, Joe, we're going to try to support net interest income. We are going to look as we enter the new year, we are going to look at a few other investments options, which we are always looking, but there's a couple of other things that are looking a little more attractive to us. So we will just have to wait and see, if we stay with these tightly structured -- not -- I mean there's no extension. Believe me, we are not looking at securities that have any extension risks, but there is some other investment vehicles that we are at least analyzing right now. And whether we move in that direction, we just don't know.

Okay. And just one other question, while I guess the early stage of delinquencies, 30 to 89 days, I think it only went up $4 million or $5 million in the quarter, but looks like that number went down at most of the banks. But it looks like there was a big chunk of rise, maybe $12 million or so at Mountain West Is that just one particular credit, or was a larger number, just wondering if you can give us any color on that?

No, that wasn't just one credit. That was just a series of -- in fact if anything, it was probably more dispersed among a number of different credits this quarter, than maybe some of their activities been in the past. But, yes, that as I said, that continues to be the market that definitely to date at least, has experienced the most issues. And probably has from a valuation standpoint, that real estate has been hit harder at any of our other markets.

Okay. All right. Thank you, that's it

You bet. Thanks, Joe.

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

HI, Good morning guys.

Hi, Matthew.

I guess just first, just a quick one on the TDRs. Can you just -- just because I am digging through my notes, I can't seem to find it -- the TDRs last quarter, and including those were on non-accrual?

Last quarter? Matthew, I will have to get that for you, I don't have that number with me.

Okay. No worries.

I don't think it was too different from the third quarter, but before we hang up your Matthew, we will get you the actual number.

Okay. And then the other one relates to -- I think the need to get some loans demand and related growth to shore up the margins. And I guess what I'm wondering is, with construction still about a 18% of loans, and assuming you guys want to -- will likely reduce that exposure, I would still think materially over the next few year or so, what level of loan origination might you need to overcome kind of the runoff in the construction and other payoff and amortization? And kind of what are they running at today?

Well, I don't have the exact numbers Matthew, but that is absolutely one of the hurdles, because I mean, although I think we are almost to a point on our construction portfolio with the huge decrease there -- I mean you actually -- I'm talking about residential construction, we could actually with any kind of uptick at all in demand, we could actually see that at least stabilized here. I don't believe the residential construction coming off of over $450 million, and now we are down to a little over $100 million, I don't see that as causing us the pain that we have had to endure over the last two or three years.

On the land development side, yes. I would agree that there is still some land development loans that we want to push out the door. We need to continue to work and deal with those, that are still non-performing. I'm not talking about any of the OREO, of course, but just those that just are in non-accrual status. Some of those are going to have to be worked on and worked out, which is going to raise the bar as to how may more additional new loans we are going to have to -- we are going to have to originate, just to kind of stay even or start to get this thing moving. We are starting to see a couple of nicer credits and some larger credits that are starting to come in that we are at least looking at. Now whether we get these or not, pricing on some of those tends to be very razor sharp, and we will just have to see how successful we are.

Again, it's so difficult, Matthew, when we are sitting here, and there has been a foot of snow on the ground since the 1st of November. And people are just not really making a lot of plans at this point in the year to determine just how good 2011 could be from a loan origination perspective. Our guess is it still going to be a soft year. And it would be a significant improvement, if somehow we were able to find a way to break even, and not -- and have our loans end the year about the same as they were at the end of December. That would be far better than what we have had in 2010. Barry, is a lot closer to a lot of that activity than I am. You got any other thoughts on that, Barry, as far as what you're seeing on there?

Yes, as Mick said, if we broke even next year that would be a plus. Frankly, I think that would be a real challenge. I just don't see it out there in the marketplace, especially with the competitive issues that we have been seeing in the last 90 days, especially on pricing. And if we were to do that, my guess is, we would have to compromise some pricing parameters that we have held dear and near to our hearts over the last few years. If as I mentioned to the group the other day, for two years, there was rationality in the commercial pricing sector, especially for pricing risk, credit risk. And in the last 90 days, that is disappearing. We are seeing some banks out there, doing some irrational things, especially on the term fixed rate arena. So if we were to maintain that growth level, it would come at the cost of pricing.

Okay.

Okay, and I have your numbers for you Matthew. As of September 30th, the total TDRs were $71.271 million. Those on non-accrual were $47.068 million, and those accruing were $24.202 million.

Great. And then just finally, the commercial real estate portfolio, I know has held up fairly well. But just curious about the $7 million increase in non-accruals this quarter, and what you might be seeing, in terms of migration to get some better visibility?

So far, knock on wood, we just haven't seen the problems there, that we have seen in two of our other portfolios, that's land development. But there has been an increase. I think it's a reflection of the overall market place, the overall economic conditions, and we anticipated that we would see an increase in there. But from that perspective, we have seen some non-accruals, we just haven't seen the loss on the vertical that we have seen on the bare ground. So it has impacted some of the borrowers, most of that is owner operator. That's what our portfolio is comprised of, and why there has been a few investment properties in there. So far, we have been fortunate in either working those out or are in the process of trying to get some of those properties sold, while the borrower still has them, rather than us.

Barry, on the $7 million that we increased in CREs, was that -- I don't remember that being any one large --

No.

And so, there again, Matthew, it was a combination of a number of smaller CRE projects --

There was --

But cumulatively, it was $7 million.

Yes, those are all $0.5 million to $1 million properties. Nothing significant.

Okay thank you.

You bet.

Next we'll go to Brett Rabatin. Please go ahead, sir

Hi, good morning .

Hi, Brett.

I wanted to a question on expenses. You talked earlier, Mick, about the challenges on the revenue side, both in fee income and essentially spread revenue, and also that OREO expenses you should be able to manage going forward. I'm curious if you are thinking about operating leverage in 2011, and any possibilities of being more efficient? And then if you had any color on where you see the FDIC premiums going with the change in the calculation?

Good points. I mean, I think we are always looking. I think that's just something that every quarter and every year, we are out there looking for ways of working smarter, getting more done with less. I thought the banks this year, Brett, did a really nice job of controlling those expenses that they were in charge of. Compensation benefits, a lot of those we didn't see. Even though you've got to remember when you are looking at the numbers, you've got to remember that this year 2011 we had one more bank that we didn't have in 2009.

So we've had in 2010, we had the bank in [Powell] the entire year where they came in late in 2009, so that was part of the reason. If you take them out, plus towards the end of the year, a little bit of the additional incentive compensation that we paid on the mortgage side of the business for the volume that was done there, I thought our numbers on our largest line item compensation and benefits was very well contained. I mean I think that you talk about efficiencies, we've heard, we've analyzed each and every one of the banks. And from an FTE perspective. I think a number of the banks were able to cut back on their FTEs, even though they grew their deposit bases. Their loans of course did not grow at very many of our banks at all. But yet, I think that they were very cognizant and aware of the fact that compensation is something that they did have some control over. I thought they did a really good job in that area. Some of the other areas that are under their control, such as advertising, building expense, some of those line items, they were actually down from the year before. So in some of those cases, in some of those line items, they really lowered their expenses in 2010 versus 2009.

Now in the FDIC premiums assessment, our calculation is that with the new assessment levels, on an annualized basis going forward, nothing else changing, it's about $1.6 million in savings for us each year going forward. Of course, that's static deposits, no growth in deposits. That is as we sit today, Brett, we would just because of the difference in the assessment, we company-wide would save right around $1.6 million annually. So if you look at the fact that we are going to lose a quarter in 2011, we should benefit for three quarters. That will be about $1.2 million is our guess.

Okay. That's good color. And then, wanted to follow-up on an earlier comment you made, Mick, about this provisioning matching expense -- provisioning matching net charge-offs, and not really expecting credit leverage. I guess I just want to follow-up on your underlying premise on that. I would assume that you would see some credit leverage this year, i.e., provisioning being less than charge-offs, assuming you are working the non-performers lower, and the economy is maybe getting a little better. Is very different view, can you talk about why you think provisioning will still be kind of a similar range in net charge-offs?

I guess there is nothing magic about it, Brett. After the last two years, we're going to err on the side of caution, than we are the other way. I mean for two years, Barry and myself have talked, we talked at the beginning of last year about credit costs and about provisioning and that. Clearly, we were still even there, we did just about what we said we are going to do, as far as our coverage ratio of charge-offs to provision. But, we were still a lot higher in overall provision, than what we expected at the beginning of the year. In 2009, we missed it completely. I mean, we weren't even close to what we expected at the early part of that year.

Of course you've got to remember coming out of 2008, we are still posting some very, very good numbers. I mean, so we had a lot of deterioration take place in 2009. It was better this year. But I guess my answer to you there, Brett, is that we are just going to be very cautious in the way we approach it this year. Hopefully, you are right. I mean, hopefully, as we progress to the year, and all of the banks continue to do their in-depth analysis, maybe there is not a strong case where we have to keep that type of provision level out there. But right now, we are probably focusing more on our experiences over the last two years. And for us, we just feel comfortable going, and stating to everyone that that is our expectations. Probably 1 to 1, and at this point in time, not much of a reserve release.

Okay. And just lastly, beating the securities issue to death here, what -- I didn't hear an effective or modified duration on the portfolio at this point, Ron, if you may have that? And then I guess I was surprised, given the conservative nature of the portfolio, the change in the OCI linked-quarter.Can you talk about that?

I don't have an effective modified -- call it -- duration here, that I can -- we have a sense again, that the key is they are of very short durations. And there is not a lot of price risk in those, they're so short, that would be the simple answer. The change in the OCI is really in large part driven by the weakness in the muni curve. I mean there was -- I think Meredith Whitney's comments completely put aside -- we saw a lot of fear and selling, and all those conditions that came together. And so, certainly beginning in November, we had a very large change in the portfolio on the muni's. And that slowed down considerably in December, but that's where all the change came from. And we may see a rebound, as that circumstance that happened in the fourth-quarter, changes perhaps over the first six months of this year.

But Brett, along that lines, still even though we did see a change in OCI this year this quarter, and like Ron said, it was really a result of that muni portfolio. One of the reasons that we keep giving up yield and staying so short on about 75% of the investment portfolio, is that we don't have major OCI issue going forward. And we can adjust, and we can move those cash flows every month into higher and higher balances. And we are not getting whacked because we went out there and stretched for yield.

Okay, no, I don't think you're taking interest rate risks. I just wanted to understand the OCI a little bit better, and the muni comment makes a little sense. Thank you

You bet

And it looks like we are going back to the site of Matthew Clark. Please go ahead, sir.

Hi, just one quick one, in terms of the effective tax rate, it bounced around little bit last year. I think it ended up around 15%, just curious what the -- what kind of rate we might want to use here, at least starting the year?

I'd say, start with 25% or 26%, somewhere in that range.

That's it, thanks.

It appears we have no further questions at this time.

Okay, well, thank you all today for joining us. It's a new year. We are looking forward to some of the challenges. There definitely are challenges still remaining out there, and some hurdles. As I said in my comments, that I believe that regulatory burden is going to be with us for the better part of the next couple of years. All we can do, is right now work hard to maybe keep it, at somewhat of a minimum. I'm not sure if we are going to be successful with that. Fee income has, as many of you know has are ready come under some strain and stress. We will have to just see where that leads us as we go through 2011.

But again, we know that we enter the year with a strong balance sheet. We've done some things last two years, we believe on the credit side to prepare us if this thing would get worse. And if it does start to show some signs of getting better, I think that that could have an exponential -- that could lead to an exponential improvement in some of our line items, and some of our income -- in the income statement especially. I mean I think that that would be something that right now, we are not expecting. But if it does end up materializing, I think it could be a good thing for us. So we are excited. We are ready to get going, and we thank each and everyone of you for your time today. And all the shareholders on the phone, we really appreciate your support. And we will continue to work as hard as we possibly can, to start to move this Company back to the level of performance that we have become accustomed to. With that, thank you all, and have a great weekend.

And this concludes our teleconference for today. We thank you for joining, and have a great day.