Heritage Financial Corp (HFWA) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for holding. Welcome to the Heritage Financial Corporation's earnings call. Currently, all of your lines are in a mute status, at the host's request. Later we will open the conference up to questions. I would now like to turn the conference over to your host, President and CEO, Brian Vance.

Thanks, Lynn. Would like to welcome to all that have called in and maybe those that may be calling in later in our recorded version. Attending with me this morning is Don Hinson, our CFO. Our earnings release went out yesterday morning prior to market open and hopefully you've had an opportunity to take a look at it.

And as with all calls, I would ask, my discussion and questions later, to refer to the forward-looking statements in our press release, and if you will just indulge me for a moment I'll read a short forward-looking statement comment. Statements concerning future performance, developments or events, expectations for growth and market forecasts and other guidance on future periods constitute forward-looking statements. Forward-looking statements are subject to 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 effect of interest rate changes, the risks associated with the acquisitions of other banks and opening new branches, the ability to control costs and expenses, credit risks of lending activities including changes in levels of trends of loan delinquencies and write-offs, changes in general economic conditions, either nationally or in our local market areas. These factors could affect the Company's financial results.

You should not take undue reliance on forward-looking statements and we undertake no obligation to update any such statements. The Company does not under take and specifically disclaims any obligation to revise any potentially forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of 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 start out by just giving you some highlights of our third quarter 2009 performance, then I'll come back and fill in with some color. Tangible common equity ratio increased to 12.1% at September 30, 2009 from 7.8% at June 30, as a result of approximately $46.7 million in net proceeds from a successful public offering of common stock. Solid coverage ratios at September 30th, 2009, including an allowance for loan losses to total loans of 3.2%, and allowance for loan losses to nonperforming loans of 70%. Strong liquidity position at September 30, 2009, including $139 million in cash and cash equivalents. Non-maturity deposits, which are total deposits less all certificates of deposits, as of September 30 increased 9.7% from 12/31/2008 and 13.6% from September 30, 2008.

Average earning assets for the quarter ending September 30 increased 8.8% from the quarter ended September 30, 2008. Give you just a comment on just a variety of generalized areas of our balance sheet and income statement. First of all, starting with earnings. We posted the Q3 net income of $312,000, the Q3 loss applicable to common shareholders, including the preferred stock dividends was $18,000 or $0.003 per diluted share, which was a slight improvement of Q2 net loss applicable to common shareholders of $239,000 or $0.04.

Our total loan loss provision for Q3 was $4.65 million, compared to a Q2 2009 provision of $4.54 million. Net charge-offs for the quarter were $3.3 million, compared to $988,000 in Q2. Even with the increased charge-off, we increased our allowance to 3.2% at September 30, from 3.02% at June 30, 2009. Our pretax, preprovision earnings before preferred dividends for Q3 were $5.022 million, as compared to $4.581 million from linked quarter Q2 2009, a 10% increase. And the same number for the first nine months of 2009 were $13.8 million, as compared to the same period in 2008 of $12.6 million, also a 10% increase year-over-year. Continuing to improve our pretax, preprovision performance is an important focus of ours. Our pretax preprovision ROA was 2.04% for Q3.

Comments on our 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 borrowings, no trust preferred and no other debt. As of quarter end, we held $122 million in overnight interest bearing funds primarily at the Fed, and average earning assets for the quarter increased 9% over prior year third quarter. Loans decreased approximately $4 million during the quarter. However, construction loans decreased by $8 million since prior quarter end, and $23.8 million since year end.

We have total construction exposure of 13.7% of total loans, with only 7% represented in residential one to four family construction including land development. Total commercial loans, including commercial real estate increased a modest $5 million during the quarter. Net loans to deposit ratio at quarter end at 89.7% was an improvement from 100.6% as of 9/30 of 2008. Non-maturity deposits, total deposits less all CDs, as of quarter end increased 10% from year end 2008 and 14% from September 30 of 2008. Total CDs declined 4% year-over-year.

As a result of the Washington Public Deposit Protection Commission issues from earlier in the year, our total public deposits decreased $52 million since 12/31/08. Net costs of all deposits was a low 1.51% for Q3. We believe some of these deposit increases are a flight to safety as well as ongoing market dislocation opportunities as we have one of the lowest cost deposit rate structures in our marketplace, which in normal time would not 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. I believe that measuring the net deposit growth is a less important metric than measuring the quality and components of your overall deposit structures, because of the major shifting taking place or should be taking place in most banks' balance sheets.

What is more important in my opinion is measuring the quality of the deposit mix and the growth of non-maturity deposits. The most valuable deposit franchises are those that rely on low cost, non-maturity deposit relationships, that tend to be stickier and more loyal and banking with you because of service rather than rate. Our non-maturity deposit ratio or pure deposits a very strong 62% of of total deposits. Differently said, total CDs make up only 38% of our total deposits.

Couple comments on our net interest margin. Our net interest margin for Q3 was 4.58%. This is a slight decrease from 4.59% in Q2 and from 4.66% in Q3 of 2008. For the first nine months of 2009, our net interest margin improved to 4.62% as compared to the same period last year of 4.56%.

Non-interest income. Non-interest income decreased $6.4 million for the nine months ended September 30, compared to $6.8 million for the same period in 2008. Income from the significant areas of service charge on deposits and merchant Visa income were stable. This decrease from the prior year period is due to the following.

Gain on sale of loans decreased $69,000, due to a total of $232,000 of SBA loan and Visa credit card loan sale gains which occurred in the first nine months of 2008. Gain on sale of mortgage loans actually increased slightly from the prior year. Brokered mortgage income decreased $73,000 from the prior year, as management increased utilization of secondary market loan sales in place of brokering mortgages. Rental income decreased $131,000, due the departure of a tenant in mid-2008.

Non-interest expense. Non-interest expense was $7.6 million for the quarter ended September 30, compared to $7.3 million for the quarter ended September 30, 2008. For the nine months ended September 30, 2009, non-interest expense was $23.5 million, compared to $22.5 million for the nine months ended September 30, 2008. The variance in non-interest expense was substantially the result of the following. For the three and nine months ended September 30, 2009, federal deposit insurance expense increased $238,000, and $979,000 respectively from the same periods in the prior year.

Impairment loss on securities decreased $996,000, from $1.3 million for the nine months ended September 30, 2008, to $263,000 for nine months ended September 30, 2009. In assessment unattributable to uncollateralized public deposits of a failed bank of $239,000 during the nine months ended September 30, 2009, is included in other expense. For the three and nine months ended September 30, 2009, marketing expense increased $148,000, and $309,000 respectively from the same periods in prior year. A significant amount of this increase was a result of costs associated with a successful checking account acquisition program.

Non-interest expense control has been a focus of ours and will continue to be. However, items such as expected increases in the FDIC assessments as well as potential future OTTI charges will make it difficult to maintain our goal of efficiency ratio under 60%. For the quarter ended September 30, 2009 our efficiency ratio was a respectable 60.25%.

Loan quality. Non-performing loans increased $12.9 million during the quarter, primarily attributable to loans totaling $13.9 million to one residential construction borrower being placed on nonaccrual status during the quarter. This is the relationship that was discussed in our prospectus for our recent cap raise.

The details of this relationship are as follows. This long-time developer, builder relationship goes back about 10 years. We are his only significant lender. The total relationship has eight finished flats, seven in the Tacoma area and one in the Olympia area, totaling approximately 220 finished residential lots. He has begun to go vertical and has sold about 10 homes since he started building out earlier this summer. We anticipate we will continue to fund construction loans to work out of his lot inventory. We have a July 2009 appraisals that support our carrying values which are further supported by the lot prices built into the homes that are sold.

Our residential construction loans as of 9/30 total $54.863 million. The total breaks down as follows. Residential land at $9 million, single family homes at $13.6 million, and A&D residential at $32.3 million. Our total non-performing loans break down as follows. OREO, $151,000. Single family mortgages, these are permanent mortgages on our books, $676,000. C&I loans, $4,362,000. And single family residential construction, $30,644,000.

And I'll break down that $30.6 million for you of non-performing single family construction loans. It breaks down as follows. Residential land, $8.2 million. Single family residential, $2.4 million. And A and D lots for sale, $20 million. OREO, we did not have any additional OREO in Q3 and the remaining OREO balance at the end of Q3 was $151,000.

Liquidity. Total available liquidity sources, cash and borrowing lines, has over $350 million, and also during the quarter we as I mentioned earlier, we improved our loan to deposit ratio to a very respectable 89.7%. A little bit about our capital offering.

We completed a follow-up stock offering on September 22nd. Due to demand, we increased the offering from our original amount of $35 million, to $43.4 million, with a 15% over-allotment option resulting in gross proceeds of approximately $50 million. We issued 4.3 million shares at $11.50 per share. We increased tangible common equity ratio from 7.8% at June 30, to 12.1% at September 30. We increased total risk-based capital ratio from 14% at June 30, to 20.2% at September 30. Our tangible book value per common share was $11.02, as of September 30.

Other benefits of our capital offering, strengthened our capacity for growth which will help fund selective acquisitions including government assisted transactions, provide additional capital that will allow stronger organic growth. And assist us in capitalize on proven ability to acquire talented relationship managers which comes as a result of market dislocations. It also will improve our already strong capital ratios and protection against further economic declines and potential regulatory criticism. It also eliminated half of our TARP warrants and allows for TARP repayment flexibility. Additionally we have continued our decision to suspend common dividends until such time as we can achieve meaningful and sustainable earnings.

Just some comments on the general outlook. Our view of the balance of 2009 is as follows and obviously these could change based on changes in the market condition. Our net interest margin is likely to decrease slightly on a go forward basis due to increasing non-performing loans, and the fact that we don't think we can lower our deposit costs much lower than we have to date. Modest loan growth. New loans will likely be offset by a need to reduce our CRE concentrations and our efforts to continue to manage our troubled loans.

We still see rogue loan pricing taking place in our marketplace that we refuse to compete with. It seems that some banks are desperate for asset growth at almost any price. We see continuing elevated provisioning for the next several quarters and most of our remaining residential construction lending is in developed land which will take some time to work it down and off. Continuing to see some developing weakness in C&I and have not seen any material performance weaknesses in our CRE loans. Due to the increase in the FDIC premiums and OREO costs it may be difficult to maintain our current level of core efficiencies.

I'd like to close with the following points. We have a strong liquidity position. We have a well-capitalized Company with risk weighted capital of 20.2% and a tangible common equity to tangible assets of 12.1%. We have a pretax, preprovision return on average asset of 2.04% for Q3. And it's been a fairly consistent number for the past several quarters. We have a strong net interest margin. We have a strong coverage ratio of 70%. Current single family construction exposure is much lower than many of our peers at 7.0% of total loans. And with our strong capital and liquidity positions I believe we're well positioned to strategically grow our Company.

I would welcome any questions at this time and once again, as I answer any of your questions, I would refer to the forward-looking statement that I read at the beginning of this presentation and Lynn that would -- if you wouldn't mind opening for questions, we would be glad to take any that our folks may have.

Okay. Thank you. Ladies and gentlemen, all lines are now fully interactive. Okay. Mr. Vance.

We're here.

Would you like all lines open or would you like to open them one at a time.

Maybe if we could open them one at a time, please.

(Operator Instructions). Okay. And first we will go to the line of Jeff Rulis. Please go ahead.

Good morning, Brian.

Hi, Jeff, how are you?

Good. Thanks. Looking at the -- in the Q, last quarter's Q you mentioned you had about $50 million of potential problem loans as of June 30th. I wondered if you could update us on, given the NPA increase this quarter, did that reduce that balance or do you have an update on that?

It reduced the balance, Jeff. We have not released our Q with specific data but it did reduce the balance because most of all of the loans that did go to nonaccrual status were previously in our troubled loan categories.

Any update on the balance as of 9/30 of potential problem loans?

Yes, that number is $37.346 million.

And this is Don Hinson. That's in addition of course to the nonaccrual.

Right. Brian, you mentioned a little bit of margin pressure going forward. I wanted to get your thoughts on the impact on margins, given a full quarter of sort of using the proceeds from the secondary sort of deploying that in maybe higher earning asset yields. If you could discuss sort of the -- what you think the impact on margins for that alone would be.

Jeff, I can't give you any specific data that would suggest a specific incremental effect to margin. Just maybe a general comment. As I indicated in my prepared remarks, we have a substantial amount of liquidity and cash at overnight at the Fed and we know that that does not yield much in these days. I think the thing we're struggling with is that to invest that amount of cash at this point in the interest rate cycle is probably maybe the worst thing a bank could do. We are investing some of this cash on a systematic basis. Typically, in short-term Treasuries, and again, the yields of those instruments are, as we know, quite low.

So I -- and I think the other thing is is that as we look to the potential of acquisitions and that was certainly one of the stated reasons why we had our cap raise, many of these troubled banks have debt on their balance sheet and we would assume that debt and I want to be in a position that if that does take place, I have sufficient cash and liquidity to pay down the debt as opposed to having it tied up in investments that may not be as easy to liquidate. I think to answer your question, will it have an impact on -- and I might ask Don's thoughts to this as well, but I doubt that it's going to have much of an appreciable impact to our go forward margin just because of our strategies on how we want to stay liquid and not have a desire to strongly leverage that cash into investments at this point.

I think our margin will go down some, just because we have a larger bucket with lower earning assets so I think you will see the earnings on interest bearing assets to go down and, therefore, the margin will go down some. The effect of course on -- because overall earning assets are going up. The effect on net interest income will not be as significant as the actual decrease in the margin but it will go down some because of that.

Thanks. And then lastly on -- just trying to get a sense of how you feel about the pricing in your market, the deposit or loan side, and Brian you mentioned a little bit of flight of quality, flight to quality. But I guess if you look out, I guess it could be a benefit or a hinderance on struggling peers. Do you foresee irrational pricing or is it more improved pricing as you have lack of competition?

I think generally we're going to see pricing improve. I think on the deposit side, due to I think some forced regulatory issues to some institutions, we've seen more rational pricing on the deposit side. There's still a few folks that are paying up substantially in the marketplace but that's largely abated. I think as time goes on, I think we'll see even more. You take a look at the average pricing costs in the Puget Sound area as compared to CD costs nationally, we're still substantially over national markets. I see that continuing to improve over the next six to 12 months. Pricing on the asset side, I referred to some issues that we've seen on pricing assets on the loan side. That has abated as well but there's still a few hold-outs that are, as I said, they're anxious for asset growth and again, at this point in the interest rate cycle, we're not anxious to take on fixed rate loans at all-time low rates. So we're trying to maintain discipline in that regard. But overall, I think we will continue to see more rational pricing on both sides of the balance sheet.

Great. Thanks.

Okay. Thank you. And next we will go to the line of Bobby Bohlen. Please go ahead.

Thank you for taking my call.

Go ahead.

Mentioned that you're starting to see some weakness in the C&I buckets. I was wondering is there any particular geography and/or type of institution that's starting to show some problems and is it cash flow issues or what could be -- what are we seeing?

When you take a look at our overall C&I portfolio, when I say weaknesses, that's not showing up in terms of increase in nonaccrual loans. I think our C&I nonaccruals have stayed pretty steady. I think really what I'm referring to is is that any industry that's -- any C&I industry that is tied to the building industry is and has shown weakness for some time. I think we're continuing to see that. But we're also seeing just our normal C&I customers. Their collections on receivables, the turn of those receivables is slowing, inventory turn is slowing, profitabilities are being squeezed. I'm not seeing material weakness but I think that the longer the challenges in this economy goes on, the more weakness that's going to show in that particular sector. In terms of geography, 80, 90% of our Company is located in two counties, Thurston and Pierce, Tacoma and Olympia, and so all of our -- most all of our C&I lending are in these markets so any weaknesses would be in our local geographic area.

Okay. And then you mentioned you may have to be looking to reduce your CRE concentration. If I look at it, your CRE on GAAP data is much lower but is it higher due to C&I loans with collateral, CRE collateral, is that what the regulator may be looking at?

I think both. I think the regulators and appropriately so are looking at CRE concentrations of all types of CRE, construction, investor owned commercial real estate as well as owner occupied real estate. I think the regulator tends to give you a little bit of room on the owner occupied side, but my sense from the regulatory focus is is that CRE concentrations in general and specifically will be attacked for the next I'll say couple of years and so I think it's prudent for any commercial bank to make sure they've got manageable CRE levels and we're cognizant of that.

Okay. And when was your most recent regulatory exam?

It was December last year. It will be coming up December, January of this year.

Okay. All right. Thank you very much.

Certainly.

Okay. Thank you. Next we will go to the line of Tim Coffey. Please go ahead.

Good morning, Brian, good morning, Don, how are you today?

Doing well. Thank you.

If you are able to attract any business and if so, what kind, from some of the competitors in your region that might be struggling?

Yes, you know, I think the answer is yes. We are just beginning to see opportunities on the C&I side and owner occupied real estate as well. As I think most of you are aware, there was a failed bank in our area in this last quarter and we're seeing some market dislocations and opportunities, both on a deposit and on the loan side in that particular transaction. We're also seeing the conversion of the old WaMu to Chase and that's creating some opportunity, primarily on the deposit side from Chase but we're also seeing as other organizations, other banks struggle and as their struggles become more public, we're seeing more concerned borrowers coming to us for assistance and I think we'll continue to see that dislocation over the next six to 12, maybe 18 months.

Okay. With the weakness that you're forecasting and some key lending areas for you, has that caused you to adjust or shift your focus on to certain risk characteristics of potential borrowers?

Tim, I think we shifted and focused risk characteristics some time ago in this economic cycle in terms of taking a look at how we -- just our general lending practices, our policies, our stance on particular types of credits, our concentrations, ticket size, all those things. We focused on those issues pretty early in this cycle, so we're not having to change what we're doing today. I think we're pretty much focused on managing whatever weaknesses that show up. As I said many times, this recession -- there's no place to hide for anyone. I think that no matter how strong your underwriting was, there's going to be certain weakness show up but I think we addressed this pretty early on in the cycle and I can't say that there's any one specific credit type or issue that we've had to change as a result.

Okay. Great. Those are all the questions. Appreciate it.

Thanks, Tim.

Thank you. And next we will go to the line of Eric Grubelich. Please go ahead.

Hi, good morning, can you hear me.

Good morning.

First of all, could you repeat the breakdown you gave on the residential construction NPAs, the dollar mix there?

Sure. Let me flip to that and my comments here.

And then related to that, could you give us an idea in terms of how you're carrying those at discount to original note value based on either actual chargedowns or specific reserves?

Okay. First question, in terms of a breakdown, and is your question specifically to nonperforming or residential construction or both.

The nonperforming, yes.

The non-performing loans break down as follows. $151,000 in OREO, $676,000 in single family residential mortgages. $4.362 million in C&I. And a total of $30.6 million in single family residential construction and I'll break down that $30.6 million.

That's what I wanted exactly, thank you.

$8.2 million in residential land and that would be land held for development. $2.4 million in single family residential and that would be typically construction of single family spec homes. And $20 million in A and D lots for sales, those would be developed lots held for sale.

Okay. Great.

And your second question, I'm sorry, I already forgot that.

The question was when you are looking at that $30.6 million of residential construction NPAs, where do you think you're carrying that as a discount to the original note value based on either chargedowns or specific reserves you've allocated against those loans?

That's a case by case loan situation. If you were to step back and if you were to say what's the carrying value, in the total $30 million in just a general sense, I would say as a discount to original note, probably 25 to 30%.

Okay. I would assume something like land is going to be probably worse.

Yes. And that's why I say, it depends on note type. The single family residential bucket, where that $2.4 million, most of our single family residential construction is entry level range. In our market that's 200 to $225,000. That inventory's moving well and likely very little marks in that category but the residential and the A and D would be where most of the marks would come from.

The example you gave of the large NPA, the developer that's starting to go vertical, do you have a sense of where those properties or those houses are selling now, compared to what the original expectation was to sell them when you made the loan?

Well, again, let me back up here. These are lots and homes being built in the Pierce County, Tacoma markets, and that's one of the hardest hit markets in the Puget Sound region in terms of available lots for sale as well as inventories of homes. I think for a variety of reasons, Pierce County is a strong military area, a couple of military bases, we're finding servicemen coming back in the market, they've been a buyer of these homes and the $8,000 rebate for first time home buyers has added to the activity in this area. But generally speaking, these homes as I indicated earlier are selling between 200 and 225 and I think probably the original values that builders had when they were building these a couple of years ago would have been in the 275 range, maybe even a bit higher, in the 300 range so it's come off significantly, $75,000, maybe a bit more, in terms of price per individual home.

Okay. Great. Thanks for the thorough answer.

You bet. You're welcome.

Thank you. And next we will go to the line of Ross Haberman. Please go ahead.

How are you, Brian?

Doing well, Ross. Thank you.

I was wondering if you can talk about loan growth, I guess in total, and is there any category you are really seeing any loan growth or expect to over the next couple quarters?

I think we've seen a little loan growth in the C&I side of things. We need to remember that we run off over $23 million in construction loans since the end of the year and that has a very effective dampening effect on loan growth. But I think we've seen a little bit of growth in commercial loans, probably a $5 million number or so, in that category. And there would be a little bit of growth in some of the others. But, you know, I think the challenge facing community banks, if you're focused on minimizing CRE exposure which I think is a prudent regulatory focus, that's -- when you look at loan growth in general, that makes up a pretty good chunk of that.

So I think that as we go forward, I think we will continue to see market dislocation opportunities on the C&I side which is going to include your traditional C&I lending inventory receivable as well as owner occupied real estate. On the commercial real estate side, that remains a very strong focus of ours, growing that owner occupied CRE and I think we'll have some opportunities in that regard and as I look forward the next six to 12 months, I think the biggest growth opportunity will be on the C&I side. And that's something as you know, Ross, we've been focused on for the last 10 years. It's not new to us. I think we know what we're doing in that regard and we've got some very accomplished lenders in that regard as well.

And any real growth in terms of your central -- of valley operation?

I think they've seen some strong growth in the last couple of years on the ag side. If you've been following ag commodity prices, they have been slipping for the last 12 months, will probably continue to do so over the next year or two. I think that generally speaking, we will not see the growth on the ag side that we've seen the last couple of years. Because of commodity price issues.

Thanks.

You bet.

Okay. Thank you. And next we will go to the line of Tim O'Brien. Please go ahead.

Good morning.

Hi, Tim.

Hi. Can you tell me how much in commercial real estate is up for renewal in 2010?

Well, I can give you some ideas. I've got vintage date numbers here. That seems to be the focus of a lot of folks. You know, we've got -- in terms of combined commercial real estate, we've got about a little over 60% of our CRE loans were originated prior to 2006. But in terms of those that are coming due in 2010, I don't think I have that one for me. You got me, Tim.

When a loan -- just backing up at a general level, when a commercial real estate loan is up for renewal, do you guys as a matter of course have a reappraisal done in this environment?

Yes, we do.

So based on -- and how many renewals have you guys done year-to-date, ballparkish? Half a dozen? Couple dozen loans?

I would guess it's probably well in excess of a couple of dozen. Just to maybe give a little bit more color on that. Most of our commercial real estate loans were written with five-year rate reviews, typically 20, 25 year amortization and a five year rate review and a 10 year maturity. We booked a number of commercial real estate loans 10 years ago. Those are coming -- actually maturing the last year or two and will continue to. So we're seeing some maturity and repricing opportunities and then of course those loans are booked five years ago, we're seeing rate review and changes and of course let me also back up and this may not have been a part of your question but annually we take a look at all of our commercial real estate loans and do a very extensive analysis of every commercial real estate loan, individual property inspection, obtain rent rolls, obtain information from the borrower, do stress testing of that particular loan, and if we see weaknesses, then we elevate it and get updated appraisals and a variety of things to manage it on an individual loan by loan basis.

So would you say that of the loans that came up for renewal in 2009, that you guys have -- you guys had appraisals done on all of those loans or was that something that you've implemented over the course of the year?

No, no, we've always gotten updated appraisals to those loans that mature.

So of the experience that you've had in 2009 so far, have you noticed, based on the original appraised value of the loans that came up for renewal, any decline in value to the point that values were below the original appraised values?

No. Let me back up, give you a bit more color on it. The commercial real estate review process that I alluded to, we typically do that late second quarter, third quarter, and we're in the process of doing those evaluations. We're about 50 to 60% done with that process currently. And to answer your question, no, we have not seen any where the valuation -- where today's valuation would exceed the original loan amount. Have we seen loans where valuations have declined? Absolutely. And then that's when we do our stress test to make sure we've got appropriate debt service coverage ratios, loan to value ratios, et cetera.

Of the loans that have been up for renewal this year, have you required either paydowns or additional collateral on some percentage of those loans?

On an isolated, a few, yes, we do, Tim, if we've got some that we've got performance issues, debt service issues, loan to value issues, we'll ask for additional collateral or other structure, changes. That's really a part of our ongoing active commercial real estate review process.

Do you anticipate in 2010 that that requirement or request from the bank is going to increase, we're going to see more of that as loans renew?

It's been a pretty systematic -- our commercial real estate review has been a pretty systematic process in this organization for the last three or four years. I don't see us needing to change that process in 2010. I think, for instance, our total commercial real estate portfolio, we're reviewing around 80% of those loans this year. And that will be an ongoing focus of ours in 2010. So I don't see -- because we've had a pretty robust process. I don't see a need to change that at this point and I think we're doing what is expected and more by our regulators in that regard.

Brian, maybe I didn't explain myself clearly. What I meant was not so much based on your credit admin and review and underwriting and re-review processes in place. I'm not uncomfortable with that. But just really based on the nature of the environment, the macro environment, based on the economy, are you expecting more distress or value declines to lead you to ask for additional collateral or ostensibly paydowns or something in order to get your loans in line, get these renewed loans back in line with your renewal criteria?

Tim, generally speaking, I think that's an accurate statement. I think as we continue to see the CRE side of things cycle through our economy, we're going to see continuing weaknesses in that sector and stresses on debt service, loan to values and as you suggest the need for restructured, additional collateral, all those things are increasingly likely as we work through the cycle. I think an important to point to remember, though, is a significant portion of our CRE portfolio is a pretty well seasoned portfolio. I think if you originated let's say 80% of your loans the last two years, you're going to have a whole lot more problems than if you originate 80% of them two years and longer ago. So from a seasoning point of view, I feel pretty good about our overall portfolio.

Thanks, I appreciate the time. I'll step back.

Thanks for the questions.

Thank you. (Operator Instructions). Okay. Mr. Vance, there are no further questions in queue. Please go ahead.

Well, I appreciate everyone's interest and encourage at any time we've had the opportunity of picking up a number of new investors with our capital raise and management remains accessible to anyone that has questions, keeping in mind full disclosure regulation issues but appreciate your interest in our Company and for tuning in our call today. Thank you very much.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.