Heritage Financial Corp (HFWA) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. Welcome to today's Heritage Financial Corporation earnings conference call. (Operator Instructions) As a reminder, today's conference is being recorded and made available for replay and information on accessing that relay will be given out at the end of today's conference. I'd like to turn the call over to the host, Mr. Brian Vance, President and CEO of the Heritage Financial Corporation. Please go ahead, sir.

Thank you David. I'd like to welcome everyone to our second quarter 2009 earnings conference call. All of you that have called in as well as any that may listen later. Attending with me is Don Hinson, Senior Vice President and Chief Financial Officer. Our earnings press release went out yesterday prior to market open. Hopefully you had a chance to review that release prior to this call. As you review the release and my comments this morning, as well as any question-and-answer discussion. Please keep in mind are forward-looking statements and just for the record, I'd like to read a short statement. Statements concerning future performance, developments or events, expectations for growth and market forecasts and other guidance on future periods institute forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from stated expectations. Specific factors include but are not limited to the effective interest rate changes, risks associated with acquisition of other banks and opening new branches, the ability to control costs and expenses, credit risks of lending activities, including changes and level of trend and write-offs, changes in general economic conditions, either nationally or our market areas. These factors could affect our financial results. You should not place reliance on forward-looking statements. We undertake no obligation to update any such statements. Additional information on these and other factors are included in the Company's filings with the Securities and Exchange Commission.

I'd like to begin with some highlights of our second quarter activities. First of all, ratio of total capital to risk weighted assets as of June 30, 2009 was 13.99%. Our non-maturity deposits which are all deposits less all certificate of deposits, as of June 30, 2009 increased 8% from December 31, 2008. And 12% from June 30, 2008 or a year-ago. Strong coverage ratios at June 30, 2009 including an allowance for loan losses to total loans of 3.02% and allowance from loan losses for non-performing loans of 104%. Strong liquidity positions at June 30, including $82 million in cash and cash equivalents and approximately $260 million in available fed funds and other borrowing lines. Net interest margin increased 4.59% for quarter-end June 30, 09 from 4.55% for the prior year quarter ended June 30, 2008.

I'll speak to just a few of these areas in a bit more detail, at this point. Earnings, we posted a Q2 net income of $91,000. The Q2 loss applicable to common shareholders including the preferred stock dividend was $239,000 or $0.04 per diluted shares. Which was a slight improvement of Q1 net loss applicable to common shareholders of $923,000 or $0.14. Our total loss provision for Q2 was $4.54 million compared to a Q1 '09 provision of $5.25 million and a Q4 '08 provision of $4.59 million. Even though net charge-offs for the quarter were only $988,000, we thought the provision was necessarily in view of increasing NPL, non-performing loans. This allowed us to increase our allowance to 3.02% of total allowance.

Our pretax, preprovision earnings, before preferred dividends for Q2 were $4.581 million compared to $4.235 million for Q1, 2009 or an 8% increase. In the same numbers for the first six months of 2009 were $8.816 million as compared to the same period in '08 of $7.717 million or a 14% increase year-over-year. Continuing to improve our pretax, preprovision performance is an important focus of ours. Balance sheet, we believe we have a strong balance sheet. At quarter-end, other than $9 million in repurchase agreements, we had no debt on our balance sheet, no federal home loan bank borrowings, no trust preferreds and no other debt. Average earning assets for the quarter ended increased 9% over prior year. Net loan to deposit ratio at quarter-end of 91%, an improvement of 98% as of June 30, last year.

Focal date total loans decreased approximately $1 million during the quarter. Construction loan totals decreased by $9 million during the quarter. Most other loan categories showed increased balances. Non maturity deposits, again, non maturity deposits defined as all deposits less all CDs as of quarter-end increased 8% from year-end '08 and 12% from June 30, '08. Drawing non-maturity deposits or also commonly called pure deposits is a service related function, while growing CDs is a price related function.

We continue to focus on improving franchise value by focusing on drawing pure deposits as opposed to growing CDs, which we all know is easy and doesn't grow franchise value. We believe some of these deposits increased our flight to safety opportunity as we have one of the lower cost deposit rate structures in our marketplace, which in normal times wouldn't attract deposit growth in and of itself. We also believe our checking account acquisition strategies continue to be successful adding to our deposit growth successes.

Our non-maturity or pure deposit ratio is a strong 61% of total deposits. Washington Public Deposit Protection Commission issued a resolution stated that by June 30, 2009 they require all public deposits to be fully collateralized. The earning released details deposit mix shifts that occuring management's, excuse me, that occurred due to management's measures to reduce uninsured public deposits from $125 million at year-end last year to only $10 million at June 30 of this year which are fully collateralized. As a result of our strategies, total public deposits decreased $43 million since December 31, 2008. As of quarter-end, we held $61 million in overnight interest bearing funds at the FED and the FLUB. We have total construction exposure of 14.5% of total loans with only 8% represented in residential one to four family construction including land development. And we continue to invest in excess funds over current liquidity levels to improve earnings.

Net interest margin. Our net interest margin for Q2 is 4.59%, this is a decrease from 4.68% in Q1 and increase from Q2, 2008 net interest margin of 4.55%. For the first six months of 2009, our net interest margin improved to 4.64% as compared to the same period last year of 4.50%. Q2 was a first quarter in the last six months that we haven't sequentially improved our net interest margin.

Non-interest income, non-interest income decreased slightly to $4.3 million for the six months ended June 30, 2009 compared to $4.5 million for the same period last year. Income from the significant areas, from the significant areas of service charge on deposits and merchant Visa income were stable. This decrease from prior year period is due to the following. A gain of sale of loans decreased $69,000 due to a total of $150,000 of SBA loan and Visa credit card sale gains which occurred in the first six months of 2008. Gain on sale of mortgage loans actually increased $80,000 from the prior year. Brokered mortgage income decreased $60,000 from the prior year as management increased utilization of secondary market loan sales in place of brokering mortgages. Rental income decreased $90,000 due to the departure of a tenant in mid-2008. The space is yet to be released.

Non-interest expense. Non-interest expense was $8 million for the quarter-ended June 30, 2009, compared to $8.3 million for the quarter-ended June 30 of '08. For the six months ending June 30 of 09, noninterest expense was $15.9 million compared to $15.3 million for the six months ended June 30 last year. The variance in non-interest expense was substantially the result of the following. Increased FDIC assessment rates and especially FDIC assessment for the three and six months ended June 30, 09. Federal deposit insurance expense increased $632,000 and $740,000 respectively from same periods in the prior year. Impairment loss on securities decreased from $1.1 million for the first six months of last year to $239,000 the first six months of this year. An assessment attributable to uncollateralized public deposits of a failed Washington State Bank in the amount of $239,000 during the six months ended June 30, 2009 also contributed to this variance.

Non-interest expense control has been a focus of ours and will continue to be. However such items such as expected increases to FDIC assessment as well as potential future OTTI charges will make it difficult to maintain our goal of an efficiency ratio under 60%. For the quarter-ended June 30, our efficiency ratio was 63.7%.

At this point I'm speak to loan quality. Non-performing loans increased $7.3 million primarily attributable to two residential construction borrower relationships, totaling approximately $6.9 million being placed on non-accrual status and a restructured commercial loan totaling $3.2 million, commonly known as trouble debt restructured.

I'll give you a break down of non-performing assets . And I'll do some comparisons of on a linked quarter basis this quarter compared to first quarter 2009. Non-accrual loans are comprised of commercial loans totaling $2.97 million, Q2 compared to Q1 number of $3.608 million. Real estate mortgages of $465,000 Q2 compared to $0 in Q1. Real estate construction loans of $16.077 million compared to first quarter number of $9.798 million. And consumer loans were zero this quarter compared to $10,000 in the first quarter of this year. For a total non-accrual loans of $19.512 million for Q1 and $13.416 million for Q1. There's the restructured loan I referred to earlier. $3.264 million as compared to $0 restructured loans in last quarter. For a total non-performing loans of $22.776 million Q2 compared to Q1 number of $13.416 million. In addition, our other real estate owned at the end of Q2 was $301,000 compared to $2.022 million for Q1. So for total non-performing assets, we have $23.077 million at Q2 and $15.438 million for Q1.

I'll give you some, I'll also give you some numbers on provision. Our provision for Q2 was $4.45 million compared to Q1 of $5.25 million or $4.59 million for Q4 of last year. So , you can see our provision for the last three quarters has ranged between $4.5 million and $5.2 million. Our losses were $988,000 for Q2 compared to $518,000 for Q1. And our total allowance for Q2, $23.707 million compared to allowance for Q1 of $20.155 million. And our loss allowance as previously mentioned was 3.02% compared to a Q1 number 3.56%. Our non-performing assets, $23.077 million as mentioned earlier compared to the $15.438 million number for Q1 or 2.39% of non-performing assets this quarter to 1.61% last quarter. And then our coverage ratio, at the end of this quarter, was a strong 104% compared to Q1 of 150%.

Comment about our OREO loans. We sold nine lots and nine houses for a total of $1.8 million. We did not have additional OREO in Q2 and our remaining OREO balance at the end of Q2 was $301,000.

Liquidity, we have a total available sources cash and borrowing lines as over $300 million and we improved our loan to deposit ratio to 90.7%. Our capital. Here's comments on capital. Our total risk-based capital is 13.99%. Our tangible common equity is $75 million or 7.8% of tangible assets. Our tangible book value per common share was $11.11 at of June 30, 2009. And we've continued our decision to suspend dividends to preserve and grow our capital.

A few comments on TARP. As you may remember, we were a $24 million participant of the capital purchase program on November of last year. And since November of last year, we have originated $126 million in new loans and renewed $269 million on existing loans. Small business loans, we continue our outreach to our community, presented at 13 separate events to 380 individuals and since October 1, '08 we have originated 22 SBA loans for $7.4 million. We believe this is an important activity in helping our local economies recover as SBA guarantee enhancements are significant for many much our small retail borrowers. We are continuing a 30-year fixed rate loan special to assist our own builders. To qualified buyers, choosing from an inventory of completed homes currently financed by Heritage Bank. Various options range from 4.51% APR to 5.381% APR for fixed 30-year rates. Today, we have refinanced eight homes for a total of $2.85 million in this particular program to some very strong, well qualified borrowers.

General outlook as we take a look at the balance of 2009, is as follows, but obviously these could change, based on changes in market conditions. Net interest margin flat to slight reduction, due to increasing non-performing loans and the fact that we don't believe we can lower our deposit costs much lower than we have to date. Continue to grow liquidity but with continuing emphasis to invest excess funds over current positions. Modest loan growth. New loans will likely be offset by a need to reduce our commercial real estate concentrations and our effort to continue to manage troubled loans. We look to continuing our strong provisioning and we have resolved most of our low-hanging fruit with our residential construction portfolio and resolution to our remaining construction loans will be problematic. We continue to see developing weakness in C&I and haven't yet seen performance weaknesses in our CRE or commercial real estate loan portfolio. And due to the increases in FDIC premiums and OREO costs it may be difficult to maintain current levels of core efficiencies.

I'd like to close with the following points. We have a very strong liquidity position. A well-capitalized company with risk weight of capital of 13.99% and a tangible equity to tangible assets of 7.8%. We have a strong and improving pretax, preprovision earnings. Stable net interest margin, a strong coverage ratio of 104%, current single family residential construction exposure currently is much lower than many of our peers and is at 8% of total loans. I believe we have built and continue to build a fundamentally sound balance sheet and are in a position to take advantage of future opportunities. We believe we will emerge with a stronger Pacific Northwest presence and believe we'll have opportunities as we move through this economic cycle. I'd like to also add that during the second quarter, at the end of the second quarter we were added to the Russell 2000 index and, which has a substantially increased our daily volume. Our first quarter daily volume average of shares was 5,416,000 shared per day. Today that average is 25,092 shares per day. And that volume is as of as of July 1, forward, which does not include several days right at the end of June where we have some substantially abnormal volumes as the Russell index shuffle took place. That completes my prepared comments. And once again, I'd refer you to the forward-looking statements as I will answer any questions you may have and Dave, I would welcome any questions from the group.

Very good. (Operator Instructions). We will first hear from the line of Jeff Rulis with DA Davidson. Go ahead, please.

Hey, Jeff.

What was the special assessment specifically? The number?

I , Don Hinson is looking it up here and can give it to you in just a moment. Go ahead Don.

One quick question, then, if he's still looking what was that 90-day , past due balance at quarter-end as well? The 90-day past due-- 90 days, right. There was about $40,000 in Q1, I didn't know if interest was a balance in Q2.

Yes, I don't have that number for you, Jeff. You mean, you mean 90 days is still accruing?

Correct.

There was none.

Okay.

90 days still accruing. Does that answer your question?

Yes, okay, I have a couple other questions, I didn't know if that assessment number was there.

The special assessment was about $437,000.

$437,000 okay, thanks. On the C&I side where are you seeing that weakness, I guess is it any specific industry or, or loan type?

Boy it's probably a little bit of everything. But the one trouble debt restructure loan that we mentioned earlier is an industry that is tied to the building supply company. Supply and building materials, et cetera, to the building industry. But I think, beyond that, Jeff we're seeing a little bit of everything the number isn't a big number, but , we are seeing some weakness in that sector.

That's it, thanks.

Thanks, Jeff.

Thank you. Next we'll hear from the line of Ross Haberman. Go ahead please.

Good morning, gentlemen, how are you?

Doing well, how are you?

Okay, you didn't talk much about refine business if you saw much of it, ... I didn't notice. I guess on your one to four residential, it was down, it was down a little, $3 million or $4 million for the six months. One, are you seeing much of it? Two, did you see much of a gain in the quarter? And is it continuing? And will that hurt the margin going forward?

Well, if I understand your question, Ross, you're talking about single family residential refinancing activity. Are you specifically referring to coming out of our existing portfolio or just refinancing activity for the public at large?

At large. In terms of affecting your gain on sale, and two, in your own, as possibly affecting your margin going forward?

Yes, in terms of new activity the gain on sale of mortgages increased $80,000 over previous years. So we are seeing an increased activity. Now that is some of that is refinance activity, some is purchase activity. So we are seeing an increased activity to the extent that , that continues at current levels, is kind of a guess. In terms of what interest rates do, but we certainly have seen an increase and I think the, any effect, it's such a small piece of our overall , income that I just don't think--

After the close I can't talk -- sorry.

Okay. But I just don't think it'll be a measurable effect either way, Ross.

I'm sorry, go on.

I was saying I just don't think it'll be much of a measurable affect because it's a pretty small part of our whole activity.

Okay. Okay. Okay, the other question is could you give us a feel for if you have a large dollar amount of high price CDs coming due over the next quarter too?

I don't think we do, Ross We do track that and we have a pricing committee every week that I'm apart of, as well as a number of others in the bank. We track the maturing CDs. I made a comment on my prepared comments that I thought our net interest margin might be stable to slightly down. As a result, I think we priced most all of our CDs down to where they will be repricing pretty much at current market levels. I don't think we're going to get much of a lift on reprice, either way, up or down.

And finally, will the regulators be a little more active over the next quarter or two in terms of shutting down some of the weaker players in and around you? And do you have the wherewithal to buy it off a whole transaction as opposed to just a piece of one or two, you might say?

Boy, Ross... [laughter] That's a big question in terms of what regulators activities might be. It's well detailed and chronicled as to the number of troubled banks in this market. To the extent that it may, you know, we've had two, in the state of Washington, close year-to-date, I just don't know what the USDA's resolution activities are. I would imagine it'll probably pick up, to the extent we can be involved.

It's something we're watching very closely and looking at opportunities on a fairly consistent basis, but that's probably all I could comment at this point. Just one question related to that, we've seen the number of deals across the country where banks, if they found great opportunities, raised money outside, possibly to take advantage of maybe some bigger bites than they might otherwise have the ability to absorb.

Is that a possibility or an option for you? I think it is.

I think that from a relative basis that the strength of our balance sheet and the (inaudible) that we've been doing I think lends itself probably to those activities and it's something that I would certainly consider. Okay, thanks, guys. Best of luck.

Thanks, Ross, appreciate it.

Thank you. Next we'll hear from Tim O'Brien with Sandler O'Neill. One moment please, go ahead sir.

Morning gentlemen.

Hey Tim, how are you? I bet it's cooler in San Francisco than it is in Seattle.

It's beautiful down here if you like fog. I'm a fan. Sorry we got the good weather today. First question I want to ask, just a little on the TDR, when did that finalize?

It finalized, I don't -- second quarter sometime.

Second quarter or something?

Late second quarter.

Late second quarter? And so I'm asking it's current now, as far as the restructuring's concerned?

Yes, it is. It's performing as per the restructure agreement.

Remind me is it six months? If it performs adequately for six months can you put it back on the balance sheet as a performing loan?

I think potentially but I think one of the critical factors is that if there is an interest rate adjustment that is substantially better than current market, it cannot be reclassified until such time that the interest rate would be at current market rates.

Is that the case here?

Yes, it is.

Okay. And then, last quarter you said we expect modest loan growth, basically your guidance on the lending front was the same this quarter as it was last quarter. And you're thinking was that you had a good chance to grow loans because of your liquidity position and also positive perceptions in the marketplace, and yet, loans were down. So what happened there? And, what's changed this quarter possibly incrementally versus last quarter that makes you think that you might see modest loan growth in the third quarter? And also in the fourth quarter. Let's just take it through the end of the year.

Sure, in terms of comments last quarter compared to this quarter, I think the biggest issue here Tim, has been, we have had opportunities to look at a number of different new loans in this past quarter. Didn't materialize for two primary reasons. Most of the opportunities were CRE and as indicated in my comments, we need to reduce our overall CRE concentrations. Consequently, we priced and structured those new CRE opportunities at rates that if we did pick them up we were comfortable with them. Competitive forces, et cetera, didn't allow that. Plus, I think that as we look to CRE exposures and get continuing and new guidance from the regulators, that, that is a focus. I think it's prudent that we look at minimizing our current CRE exposure. So, that event affected Q2 and I think it will continue to affect loan growth as we move through the balance of this year.

Is there anything more positive heading into the third quarter, and looking out into the fourth quarter from a loan, a lending prospect standpoint that has improved over the second quarter?

I'll go back to comments I made in Q2. I do think that there's going to be opportunities as we talked about the resolution activities potentially from the FDIC. I think if and when that happens, our ability to, because we have the the liquidity and the capital, I think we would have the ability to look at some of those opportunities, but was I hasten to add that our primary focus is going to be in the C&I area. So to the extent that C&I opportunities present themselves, I think we can capitalize on that. But I think the changing issue here is again, the increasing focus regulators are putting on CRE concentrations. And I do believe that, in fact, I can't be quoted on this with any degree of accuracy, but I think the state of Washington is one of the highest in the nation of community, excuse me, commercial real estate concentration , and that continues to be most of the opportunities that I think Community Banks see in this market and to the extent that any bank has concentrations, I think that'll get continuing focus of regulators.

Okay, with regard to your C&I portfolio, do you have a sense of, first of all, is some of that, are some of those C&I loans asset-based and monitored differently than your standard operating lines?

Absolutely. We have an , we have a -- I'm sorry?

What's the break down between, you know, within that C&I portfolio between standard operating lines and asset-based, closely monitored lines? Approximately on a dollar basis?

Tim, I can't give you that number. I don't have it right here. I'll explain the process. I do have that number - it is a number that we follow very closely, because all of the monitored lines are monitored through a central process. We review the activities of those loans on a monthly basis and reports are sent to me of each and every one of those in our aggregate numbers. We do have it broke out, I just didn't bring that data with me. But we do have a centrally monitored process which takes a look at the advance ratios of inventory and receivables to determine whether or not the line is within all established, borrowing covenants. And any time that we find that we're out of covenant, there's a very quick reaction by the lender, by our central organization, our credit administration and the lender to manage those lines back into compliance. I think we have a pretty strong process of managing that sector of our C&I portfolio, because as we all know, that is the most risky sector within any C&I portfolio.

Okay, and it's my understanding, standard operating practice is, and possibly, regulatory requirements, call for complete pay down of C&I loans for a 30-day period per year, per 12 months.

I don't think there's any regulatory guidelines established for that. I think it's probably more organization to organization. I think if you have a standard , asset-based line which is which is advanced against receivables and inventory, the line rarely pays off because you're rolling the loan to the constantly rolling receivables in inventory. I think if you have more of a non-guided operating line that maybe some sort of an advisory line, those lines are often required for annual cleanup. We do have some of those that we monitor for annual cleanup, but those are typically substantially different than your typical receivable inventory line.

Would you say that the second loan that you described there, that's a sizeable part of your portfolio?

No, it would be likely less than our structured receivable inventory loans.

Okay, regarding SBA loans, you mentioned that you guys had good origination this quarter and, just refresh us, are you guys licensed to originate 78504 express? What's the limitation of your SBA business, if any?

We're a preferred SBA lender. We had an SBA presence for a number of years. About a year and a half, maybe two years ago, we hired the Seattle SBA office manager. She had responsibilities with the Seattle district and she is our SBA lender and she's been on staff for close to two years now. So we are a preferred lender. We originate 7A, we originate express and we originate 504 and we've been a pretty active originator of all three of those. Perhaps not the express so much, but certainly 7A and 504 for several years.

With regards to the loans, are you holding those on the balance sheet given the lack of alternative, high-yielding investments? Are you going to retain those? Is that the plan going forward and how do you see opportunities in the second half of this year?

When we hired the SBA individual I referred to earlier, we had created a strategy at that point to sell most, if not all, of our 7A originations selling the guaranteed piece. That gain on loan sale that I referred to earlier in my comments was a result of the activity that took place in the first six months of last year. As we know, that market has dried up. We are portfolio in those guaranteed portions to the extent that the premiums returned, we may consider selling them. But we would (inaudible) much better premium that's in the market place today. But it was our original strategy to sell that portion and I think when those premiums returned, we would do that as well. So, was there another piece to your question that I don't recall?

I guess that's something that could -- oh, as far as on a go forward basis for the next half of this year, the second half of the year, do you see that as a pretty good source of new loans? Quite possibly? You know how do you look at that?

Yes, I do. I think we had good volume for the first six months of this year and the 7A and we have some 504 as well. I see that volume continuing through the balance of this year, perhaps even improving a bit and for a variety of reasons. Through the stimulus plan, the federal government improved the guaranteed portions of these loans, and I think it has made it a very attractive credit enhancement to banks for new borrowers as well as some existing borrowers. I see that as a fairly important strategy of ours for the balance of this year.

Just as an aside I heard anecdotally the premiums are back there. Moving on really quickly, longer term investment growth, you guys had pretty good sequential quarter growth in AFS Securities. Can you tell us what kind of securities you added and why AFS? What's the thinking, strategy behind making those available for sale?

Certainly, I'll ask Don to respond to that.

We did add some, put some of our liquidity to use. We did buy some of the investment assets over the quarter. We bought a combination of some CMOs and some uni-s addition to some of that FDIC guaranteed corporate paper. So most of it was CMOs, but we're buying kind of short-term average life loans so they're not long, 30-year pieces of paper.

And will you continue to do that here, second half, most likely?

I think that we will continue to monitor our industry risk position at the same time trying to put our liquidity to use.

Just an add-on to that, Tim, I think that liquidity is, if capital is king, liquidity is queen. I really think that we want to continue to manage a strong liquidity position, fully understanding there is a cost to liquidity, that we still believe that's an important function. Now, as we move forward, if we continue to see flight to safety from a deposit growth point of view and or/if there are failed banks in our area that cause abnormal amount of flight to safety, we would certainly need and want to invest more than what we have. I think our investments going forward, will be limited to liquidity that is over our current liquidity position. So to the extent that it increases, I think we'll probably look to investment activity.

So is that a back hand way of saying that cash and equivalents, you're going to be monitoring that very closely going forward?

Yes.

Thank you very much, gentlemen, I appreciate the time.

Yes, thank you, Tim.

And we have a follow-up from Jeff Rulis. Go ahead, please.

Hey, guys, sorry. One quick clarification on your construction MTAs. $16 million wondered if you could break that out in terms of what's vertical or landlord or lots, if you could offer that?

Last quarter, Jeff, you asked me for break out by geography. I have that for you now, but I don't have what is vertical or horizontal. Maybe Don does.

Let me give you a break down on geography. Of the $16 million, about $4 million is in Thirsty County, about $6.2 million Pierce and $5.5 million Snohomish. Don may have a break down of vertical and horizontal.

$16 million. Land development loans is about $12.3 million of that.

I guess you'd call that your horizontal portion is about $12.3 million.

And that's certainly the - as we get to this point in the cycle, as I indicated in my comments, the most problem problematic piece of the construction portfolio. We'll have to work that one very carefully as we move through.

Okay, thanks.

Thanks, Jeff.

We'll hear again from Tim O'Brien. Go ahead, please.

One more question. I don't know if you guys can share this, but can you tell us what the specific provision was on those two construction loans that went to non-performing this quarter?

No. I'd prefer not to.

That's okay, just thought I'd ask. Thank you very much.

You bet

Next we'll hear from, pardon me, a follow-up from Ross Haberman. Go ahead, please.

I just have a follow-up question regarding the $16 million in which you call your realistate construction non-performers, Brian, what are you carrying those at? Or what have you marked them down from their original valuation?

Oh boy. It varies, Ross.

I mean, could you generalize and say you know, an average or something? I know each loan will of course be a mark down separately, but are they down 20% from the original value or just some broad strokes there?

Yes, I think the way we have typically handled our non-performing assets which may change as we move forward, but the way we typically handled it is through a FAS 114 adjustment to each one of those. So , there may have been a few that we - and there have been in that total that we have specifically written down. I would imagine those that we have written down, probably in the 20% to 30% category. It would be a pretty fair statement.

Do you think, well let me ask it a different way. Do you think that $16 million of real estate construction is marked down to saleable prices? Or that's sort of you know, theoretical, estimated valuations?

Yeah, I think the issue we have, Ross, is that, what's the value of some of these assets in a very, very volatile market in terms of the asset value today, is different than yesterday and will probably be different than tomorrow. So, that's a tough one to estimate as we work through this cycle. I wish I could give you a better answer, but, it's difficult.

Thanks, again, guys.

You bet, Ross

If there are further questions press star one at this time. Mr. Vance no further questions queue.

I appreciate your interest as always and hopefully those that will - there'll be others that tune in as well to the recorded version and, I look forward to chatting with you again after Q3 ends. Thank you very much.

And thank you, sir. Ladies and gentlemen a replay of this conference will be made available starting today at 1:00 p.m. Pacific time through the 14th of August at midnight. You may access the playback service by dialing (inaudible) and entering access code 106447. International participants dial 320-365-3844. 1 800 75-6071 or 32 0-365-3844. Access code 106447. That concludes your conference. And you may now disconnect.