Columbia Banking System Inc (COLB) 2007 Q1 法說會逐字稿

Welcome to the Columbia Banking System's conference call. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to your host, Melanie Dressel, President and Chief Executive Officer of Columbia Banking System. Please go ahead.

Thank you, Shirley. Good afternoon, everyone, and welcome to Columbia's conference call. I'm going to assume that you've all seen our earnings which were released yesterday and which are available on our website. While we typically don't hold a conference call every quarter, we wanted to review our quarterly results, as well as give you the opportunity to ask any questions you might have.

Joining me on the call today are Gary Schminkey, our Chief Financial Officer, Mark Nelson, Chief Banking Officer, and Andy McDonald, Chief Credit Officer. I'd also like to introduce the newest member of our management team, Kent Roberts, who is Executive Vice President and Director of Human Resources. Kent has been with us since December of last year and has over 30 years of human resource experience. We are just thrilled to have his experience and dedication, and it's important to us that we are a great place to work as well as a great place to bank.

To begin this conference call, Gary will briefly go over our first quarter performance numbers for you. Mark will review our lending, depositing-gathering strategies, and the retail side of the bank in some detail, and Andy will discuss our credit quality and also talk a bit about the economy in our market areas. I will then discuss our strategies going forward to expand our franchise and build shareholder value. After our discussion, we'll give you the opportunity to ask questions.

Before we begin, I'd like to remind you that we will be making some forward-looking statements today which are subject to economic and other factors, and for a full discussion of the risks and uncertainties associated with the forward-looking statements, please refer to our securities filings and, in particular, our Form 10-K filed with the SEC for the year 2006. And now I'll turn the call over to Gary.

Thanks, Melanie. Yesterday, we announced earnings for the first quarter 2007 of $7.3 million, or $0.45 per diluted share, compared to net income of $8.2 million, or $0.51 per diluted share for the first quarter of 2006. As we mentioned in the release, we face the same economic pressures and challenges as the rest of the banking industry, particularly in regard to the growing competition for low-cost deposits and the resulting net interest margin compression. However, we feel we have a competitive long-term advantage because of the composition of our loan portfolio and deposit mix.

I'd like to begin my discussion with the most visible reason for the decline in net income quarter-to-quarter, net interest margin. Increases in our funding costs have impacted our net interest margin. The net interest margin decreased to 4.37% in the first quarter 2007, compared to 4.65% for the same period last year. One basis point in the margin equates to about $240,000 per year. So, assuming no other moving parts, the year-over-year before tax impact would be about $6.7 million, or about $1.7 million for the quarter.

Also impacting our margins is the above average loan growth accompanied by a lag in gathering deposits to fund these loans. We currently fund the difference using short-term borrowing. Average asset yields have increased to 7.16%, or 52 basis points quarter-over-quarter. Average interest-bearing liabilities have increased to 3.53%, or 94 basis points quarter-over-quarter. We expect this pressure on our earnings to continue to some degree. Competition for low-cost deposits is strong and yields on our earning assets have been impacted by the flat yield curve, especially our fixed rate loans that have yet to reprice.

Since quarter end 2006, we have made an investment in some great people very experienced bankers and a builder banking team based in King County. Over the last 12 months we have added FTE of approximately 31 new bankers to our team, both in lending and in the retail areas of the Bank. Staffing in the operational side of the Bank has either remained the same or has declined. Total FTE was 675 people at March 31, 2007, versus 640 last year at this time. These additional income producers have increased total revenue defined as total interest income plus noninterest income by $12.7 million, or 37% quarter-over-quarter. As I mentioned before, this growth in revenue was offset by increased funding costs resulting in flat net interest income quarter-over-quarter.

We were pleased with the growth in our loans, particularly during the latter part of the quarter. Our loans ended the quarter at $1.8 billion, which was an increase of 15%, or 239 million from the first quarter last year, and 7%, or $125 million, from December 31, 2006. While we have incurred the expenses to generate these new loans including an appropriate provision for loan losses, we haven't yet realized our full quarter earnings benefit.

Our asset quality metric remains solid, and we have the advantage of a balanced portfolio giving us flexibility when considering new lending relationships. Nonperforming loans to total loans were at an all-time low, 0.18%, versus 0.20% at year-end 2006.

Return on average equity for the first quarter of this year was 11.52% compared to 14.37% for the first quarter 2006. Our efficiency ratio was just under 63.4%. The efficiency ratio was very much affected by revenue growth as well as by expense growth. The investment in the future growth of Columbia has caused the efficiency ratio to climb. Impacting the efficiency ratio are net revenues, which are flat quarter-over-quarter. We would expect the noninterest income will increase slightly over the remainder of the year.

Noninterest expense grew by $2.1 million quarter-over-quarter with compensation and benefits accounting for 1.7 million of that total. I have previously discussed increases in our production staff. Premises and equipment accounted for roughly $200,000 of the increase in expenses.

Also included in expenses for the first quarter are expenses relating to our recently announced merger agreements totaling about $100,000. These are costs that were incurred prior to the signing of a definitive agreement. As a rule, costs incurred after the signing of the deal will be aggregated and accounted for as part of the deal. We also incurred some employee acquisition costs in the first quarter of approximately $110,000.

Finally, we accrued an additional $150,000 toward our group medical plan due to higher than expected medical claims. All in, nonrecurring expenses in the first quarter are approximately $310,000 before tax, or about $0.01 per share after tax.

We have dramatically grown loan totals, but that growth was not on the books long enough in the first quarter to positively affect bottom line results. Although we will continue to fight margin pressure, these loans will contribute to earnings going forward. We continue to work toward increasing our core deposit totals with various employee incentives and sophisticated deposit and cash management services.

Looking toward the future, we may expect net interest margin pressure to continue as a result of competitive loan and deposit pricing and a flat yield curve. We continue to closely monitor and control expenses, but we believe that excessive reductions in expenses will not achieve long-term success. Due to the current economic pressures, we have challenged our managers to reduce expenses as much as possible for the remainder of the year.

As you review our statement of income, you will notice that most categories of expenses are below the levels from last year, with the exception of salaries and benefits, occupancy, merchant processing, which has a direct revenue offset, by the way, and legal and professional services.

The legal and professional services category was much lower than normal last year due to a refund from one of our consultants. This expense had been paid in prior quarters of 2005, totaling about $300,000.

At this point, I'd like to turn the call back over to Melanie.

Thanks, Gary. As Gary mentioned, we do expect the pressure on our earnings to continue, as our earnings assets are affected by the flat yield curve and the strong competition for deposits. However, Columbia has the advantage of a healthy core deposit base of 73% of total deposits. And, in fact, our core deposit growth increased during the final month of the first quarter. Of course, this has helped us manage the expected pressure on our net interest margin as cost for deposits caught up with rising interest rates. As always, we focus on our core value of deepening and strengthening customer relationships by providing the best service possible. This focus will help us meet the intense competition coming from other financial institutions, the equity markets, and the trend to businesses using their own cash first before borrowing.

Now I'd like to turn the call over to Mark.

Thanks, Melanie. For much of the last year and increasingly into 2007, our focus has not only been on the growth of our loan portfolio, but also to properly fund this growth with core deposits. Our marketing initiatives, product development, internal business development campaigns, and officer incentive programs all focus on aspects of deposit generation in addition to loan and fee income. We track the historical patterns of our deposit cycles closely from year-to-year.

In 2007, we've experienced much earlier rebuilding of end-of-period deposits compared to the decline we saw in the first quarter of 2006. By the middle of February, our monthly averages were cycling above peak 2006 year-end totals and continued to build throughout March. This allowed us to fund much of March growth -- all of March growth entirely through deposit increases. While some of this is cyclical, anecdotal evidence suggests that our campaigns and incentives are having the desired effect.

Further, our cash management team, which is part of our Commercial Division, has focused on enhancing our capabilities with large deposit clients, such as title and escrow companies, nonprofit organizations, and property management companies.

On the retail side, the focus has been to continue our tremendous success in building small business relationships, which has been a core business segment for Columbia over the years. These companies tend to be significant users of deposit and fee-based services. We are well positioned to provide the products and high levels of service they require through our branch network, trained staff, and targeted product mix.

Our credit card processing capability through our Merchant Services Division continues to help us attract and retain small business clients, and pumps in new deposit dollars every month, even though margins in this business have narrowed.

As Gary mentioned earlier, we took advantage of the opportunity to invest in experienced bankers, which resulted in above-average loan growth. As would be expected, there is a lag in the related deposit growth.

During the first quarter, we put the finishing touches on Columbia Bank's remote deposit capture product under our name Daily Deposit. We're rolling out a focused calling campaign during the second quarter to offer this convenient new product to new and current clients particularly in areas like King County, where we have fewer branches. We anticipate we'll see success in moving deposits as well as loans to Columbia Bank.

After a stellar first quarter of loan growth, we do expect some moderation in the rate of our growth in the second quarter as our pipeline rebuilds. However, we would be disappointed if our loan growth didn't reach of exceed 10% for the year. Additionally, we continue to refine our loan pricing model to reflect our margin and profitability objectives.

Finally, we have several initiatives to improve noninterest income including increasing deposit-based fees, a financial services campaign, and, of course, continued product enhancements.

I'd like now to turn the call over to Andy McDonald.

Thanks, Mark. The credit quality of the Bank's loan portfolio was excellent in the first quarter of 2007. Nonperforming assets for the quarter were down slightly from fiscal year-end 2006, and stood at 3.4 million, or roughly 0.18%, when compared to period ending loans as of March 31, 2007. Net charge-offs were another bright spot with the bank experiencing net charge-offs for the first quarter of only $1,000, compared to $353,000 in the first quarter of last year. In summary, our credit metrics remain solid.

I would like to take a moment and highlight a couple of items. First, Columbia Banking System and its subsidiaries have not originated subprime or Alt-A mortgages. These types of loans have received a lot of press lately and I'm pleased to report that we have not originated nor purchased any of these types of loans.

Second, our residential construction and development portfolio, what we like to call our Builder Banking Portfolio, remains stable. We had no criticized or classified builder banking borrowers at fiscal year-end 2006, nor do we have any now. Nevertheless, we continue to monitor this segment closely given the challenges we have seen in other parts of the country.

With this in mind, I would like to echo Gary's comments earlier concerning the overall mix of loans in our portfolio. It remains well balanced between commercial business, investor-oriented real estate, both commercial and residential, and owner-occupied real estate. This balance gives us the ability to continue to pursue new lending relationships based on their merits without the constraints created by excessive concentration in any single category. It also helps provide needed diversity which we believe enhances the credit quality aspects of a loan portfolio.

For the quarter, the Company made a loan loss provision of 638,000, compared to 215,000 for the first quarter of 2006. The increase was primarily due to the strong loan growth experienced during the first quarter of this year compared to the first quarter of 2006. Of course, we will continue to add to the allowance for loan losses as necessary based upon factors such as loan growth, the economic outlook, and a thorough analysis of our existing portfolio.

And now I would like to spend some time talking about our regional economy. Although we saw some moderation in economic expansion last year, the Pacific Northwest economy continued to show good growth across-the-board in the regions we serve. The South Sound, King County, Southwest Washington, and the North Coast of Oregon. Pierce County is our largest market, accounting for about two-thirds of our deposit base. In the Tacoma-Pierce County Chamber of Commerce recent forecast for 2007, they are predicting that after two years of very strong growth, the local economy will register more moderate but solid economic gains.

Dr. Bruce Mann, a professor of economics at the University of Puget Sound, believes it's a healthy moderation since the county experienced a two-year run well above what could be sustained with 10% expansion during 2004 and 2005. Strong labor market conditions late in 2005 continued into 2006, and a steady balance in the labor market is predicted with the rate of job creation in the 2% range for this year. A good solid performance is also anticipated for retail sales in 2007, along with a rise in personal capital income averaging a very healthy 4.4% annual rate of growth. The full report is available at www.tacomachamber.org, if you are interested in more information.

The South Sound housing numbers do reflect a changing market. Home prices are continuing to rise, up 6% from a year ago, but it is taking longer to sell those homes. While it used to take between two to three months to sell a home, it's now stretching out closer to five or six. However, a balanced market is considered to be between five and seven months, so it appears at this time that the market is simply moving towards a more normalized level of activity. This is further supported by the fact that Pierce County continues to enjoy job growth in the construction sector as reported by the State's Employment Security Department.

The Port of Tacoma continues to grow volume as well, and was recently named the most efficient port of the West Coast. Over the past five years, the Port's container traffic has grown 59%, and there are expectations for 50% growth in container volume by 2010. There are also a number of major public construction projects underway in the South Sound, as well as the Tacoma Narrows Bridge project and the continued rejuvenation of the downtown core.

The economic forecast is even more favorable for King County, which is a very large, affluent market, and is expected to out-perform the nation for the next several years. We currently have eight branches throughout King County, accounting for about 18% of our deposits. According to the Puget Sound Economic Forecaster, the near-term outlook for the Puget Sound economy is very healthy. They are predicting 2.9% and 2.7% employment growth in 2007 and 2008, roughly twice the expected U.S. growth rate. Software employment is expected to grow through 2009, and the aerospace industry continues to add jobs. The ramp-up of Boeing's airplane production and a growing backlog of deliveries is one of the factors driving growth in the region. In this regard, just yesterday Boeing announced that its backlog climbed 23% to a new record of $262 billion, thanks to strong commercial plane and defense orders.

Cowlitz County's economy was on the upswing in 2006 as well. Their labor market had its best year since 1995, and the population and personal income has been rising relatively slowly but steadily over the past decade.

Finally, the outlook for Northwest Oregon also looks good, as non-farm employment continues to grow and unemployment rates decreased in 2006. While there are some mixed signals that the economy in the nation -- the Northwest is softening, we still see strong growth opportunities in all of our Washington and Oregon markets.

And now I'll turn the call back over to Melanie.

Thanks a lot, Andy. Although we face the challenges of increasing competition for both loans and deposits in a flat yield curve with its resulting pressure on our net interest margin, we believe we're well positioned for success in improved profitability in 2007 and beyond. While we expect our loan growth to moderate in upcoming quarters, we have the plans, banking teams and systems in place to capitalize on our advantages.

We've mentioned our new banking teams. Most of these high quality experienced bankers sought out Columbia. They wanted to work for an organization that truly cares for the needs of the customers. They believe in our core values in keeping decision-making close to our customers and for creating long-term relationships rather than making short-term profits from billings and artificial sales quotas.

As Mark mentioned earlier, all of our Columbia bankers throughout our market areas are working hard to deepen and strengthen our customer relationships, and they have the tools to do so. Our bankers are incented for this type of behavior, which includes banking the entire relationship, generating deposits, loans, and fee income.

As I'm sure you know, we have some exciting growth opportunities that should expand our geographic footprint, enhance our profitability, and move us a significant step forward as we position ourselves as a Pacific Northwest regional community bank. The boards of both Mountain Bank Holding Company, headquartered in Enumclaw, Washington, and Town Center Bancorp, headquartered in Portland, Oregon, unanimously approved the definitive agreements to merge.

Following shareholder approval, which we expect during the third quarter of this year, Columbia will join forces with two well-run, profitable financial institutions with remarkable cultural similarities with us. We'd been looking for quite some time to enhance our presence in the King County market. Columbia Bank will open new full-service branch office in Bellevue next month, and it's located right along the I-405 corridor just south of the Bellevue Athletic Club, for those of you who are familiar with Bellevue.

The Lacey branch, which was delayed by permitting issues, is now under development and we expect it will open in the fourth quarter of this year. The Bank of Astoria, which will be celebrating its 40th anniversary this summer, has announced that a new Tillamook location has been approved and is scheduled to open early next year.

While we are committed to growing our market share in the Pacific Northwest, we'll remain disciplined in our approach to that growth. We're optimistic that our successful strategies of investing in growth and our experienced, talented bankers will move us toward our goal of becoming the community bank in every community we serve. We will stay true to our core values, remaining grounded in long-term decision-making that will benefit our shareholders, our customers and our employees.

Our Company was formed in 1993, as we saw opportunities to step in to be the community bank in the Pierce County market. Throughout our history, we have continued to take advantage of opportunities to expand our franchise with the long-term interest of our shareholders in mind. The additions of two banking teams as well as the opportunity to partner with great organizations like Mt. Rainier Bank and Town Center Bank are further examples of our long-term vision of building our Company when we see opportunities to expand effectively. These long-term decisions can have short-term impact on our operating performance but these decisions are made consciously and deliberately for the long-term benefit of our Company.

That being said, we also recognize that the current interest rate environment puts an unusual burden on earnings. We will continue our focus in building core deposits, maintaining a diversified loan portfolio, and concentrating on credit risk management. We still anticipate opening up up to three branches per year, although we will be thoughtful in our expense control.

I think we'd all agree that these are unusual times in the economic cycle, but we recognize that we have momentum to grow effectively into a true Pacific Northwest regional banking franchise, and I truly hope that you agree that the investments we're making today will add long-term value to our franchise.

And with that, just a reminder that Mark Nelson, our Chief Banking Officer, Andy McDonald, Chief Credit Officer, and Gary Schminkey, our Chief Financial Officer, are with me to answer your questions. And now, Shirley, we'll open the call for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Matthew Clark with KBW.

Good afternoon. Can you guys size up the number of bankers that you guys hired associated with these two banking teams? I believe one of them was probably just two, but the other team as well? I guess what's new to the run rate, and how large are their portfolios through the -- at the end of the first quarter?

Mark?

Yeah, Matt, Mark Nelson. I'd be happy to answer that. Actually, we hired nine bankers including one private banker in the King County market. Right now we have added relative to those folks a little over $60 million in loans outstanding. About half of our first quarter growth would have been attributed to the new folks that came on.

Okay, great. And then can you help me with the -- while we're talking about loan growth, can -- the 10% that you laid out there, it sounds like you're being a little conservative since you're 75% of the way there through the first quarter. Would you agree with that?

Yeah, that's possible. As I said, in the second quarter -- we had a very aggressive, which ate through our pipeline of loans. And while we still have a strong pipeline, we would expect to spend a lot of effort into the second quarter and early summer rebuilding that. We also are looking towards in some of our construction loans and a couple of companies that have sold to see some paydowns. And so we'll be replacing some of those assets in the second quarter as well.

Okay. And then, finally, can you also help me with the disconnect between your comments about concerns about margin pressure here when you saw a surge in loan growth at the quarter end, it hasn't fully hit the bottom line, as well as the acceleration of core deposit growth at quarter end as well?

I guess I'm not sure what you mean by disconnect. Maybe you could clarify that.

Well, it sounds like a lot of the benefits to the interest income on loans hasn't been realized yet, because a lot of this growth came toward the end of the quarter. The core deposit growth was up 12% annualized end of period, and that hasn't fallen to the bottom line. You should expect to see -- I would think given that -- given that mix, you would -- the margin could hold up better than I guess your comments about concerns in the near term about the margin?

Well, our deposit growth really started, as I said, in mid-February, and our core deposit growth trended with our historical average of 73%. Overall deposit growth has also risen, so I would say that we experienced more expanse with deposit growth coming on mid-quarter and affecting us through March, whereas, our loan growth, a big chunk of that, came on very, very late in March, most of it in the final week of the month.

I guess what I'm getting at is the outlook for the margin.

Matthew, this is Gary. I think another issue on the deposit side, as Mark mentioned, many of the deposits came in toward the latter part of the quarter. At this point we would typically anticipate that deposits would trend down a little bit in April due to federal taxes and property taxes, and so on. So, to fill that void we are borrowing overnight. So, that's where we have some hesitancy when we talk about the margin.

Fair enough. Thanks.

Your next question comes from Louis Feldman with Punk, Ziegel & Company.

Good afternoon. Nice picture in the News Tribune, or at least on the website. Gary, in terms of -- going back to the deposit question, Gary or Mark, can you talk about in terms of the decline in deposits? Because there is another disconnect in terms of the end of period balance and the average balance, when the average balance was actually down on the linked quarter basis versus the end of period numbers. So, that would assume given the information you just provided about deposits starting in mid-February, you might have seen a significant decline in January. Is that correct?

That's not unusual for us, Lou.

Well, no, it's a seasonal issue.

Yeah, it is, and we have a strong commercial and small business customer base. There is plenty of things that they pay out for at year-end, employee bonuses, taxes, distributions to professional partners, those kinds of things we historically see in the first part of the year. And then we also do see, as Gary mentioned, deposit runoff a bit in the month of April and early May, as people pay federal income taxes and property taxes are due here in the state by the end of April. So, those things all seem to be historical patterns.

I think, Lou, looking at the borrowings on the balance sheet, it shows that the balance at the end of the year versus the balance at the end of March are fairly close together. Reality is, those are end of period balances, so during the quarter I think the average of the borrowings were in the neighborhood of $230 million to $235 million, and they did get as high as in the 270s. So, I think the surge of deposits in March really altered that result for our end of period balance sheet.

Also, the increase in swaps?

I'm sorry, the increase in --

The securities sold under agreement to repurchase, which was up 50 [inaudible] quarter?

Oh, yes. Yes.

Okay. I'll skip that one until later. Mark, can you talk about what kind of pricing power that you have on your lending at this point in time within your footprint?

Well, as we mentioned in there, it's definitely a competitive environment today. We're seeing longer term rates that we would certainly like to be higher than prime rate, but there is a lot of competitive pressure there. Our focus on all of our loans over $250,000, we'll model those in our pricing model, and we continue to adjust the parameters in our pricing model to reflect our equity return expectations.

Are those shifting, your equity return expectations?

We've had long-term expectations of over 15% return on equity, and so we continue to try to drive towards that number more over time, and our model would reflect that. I think costs of capital have clearly gone up over the last couple of years, and so we have increased our hurdle rates within the model. We've also increased our costs to reflect what it costs us to put loans on the books.

Lou, one thing that we've been consistent about is we want to bank on or lend money to those people who are going to bring a relationship to the bank, and we're not just out looking for loan totals at any price. Our entire field of bankers are incented both on loans and deposits. So, I think that gives a little bit different perspective. We definitely want to be competitive, but we're not putting loans on the books at any cost.

So, if I understand this correctly, I guess what it comes down to, Mark, are you finding yourself passing on more and more deals at this point in time due to pricing from competitors?

No, what we're doing is having our people focus on other ways they can improve our earnings on a relationship through fees and deposit generation. All of that is incorporated into our analysis.

Okay. And then, lastly, Andy, in terms of the construction components, do you have an upside limit that you'd like to see it stay below? This is the second, third quarter in a row that we've seen fairly significant gains. Granted, it's a small number and it's still -- where is that, 14% of the portfolio, but do you have an upside limit that you'd like that to go to?

We do have limits set by product types, whether it be commercial, whether it be builder banking, whether it be land, A&D kinds of deals. So, we really look at it in terms of diversity across the construction portfolio in terms of just construction in general. And so, yeah, we do have those limits, but we probably wouldn't want to share them with any of our competitors.

But needless to say, we're not constrained right now in our portfolio. Construction was a very, very small portion of the portfolio a couple of years ago, and so I would -- I guess the best I can say is that we're not hesitant to make construction loans right now.

Okay, thank you. I'll step back.

Your next question comes from Joe Morford with RBC Capital.

Good afternoon, everyone. I guess probably my question is for Gary. As you look at the funding side of things, is there an opportunity at all to take down the investment portfolio and use some of the liquidity there to fund the growth?

Well, we have looked at doing that. It would actually decrease earnings to do that, some of our yields on the investment side, not including the loss that we might have to take on certain of the investments. But it does positively impact the bottom line. I think we have many other sources of deposits and borrowings that I think would probably work better than that. But, yeah, you're right, we have looked at that.

And can you update us in terms of what the expected monthly or quarterly cash flows and maturities are from that portfolio?

Maybe not the monthly, but for the year --

Yeah, annual, that's --

Annually, I think we're looking at about 60 to 70 million.

Sixty to seventy?

In terms of cash flow.

Yep. And just the other question was the tax rate looked a little lower this quarter, and anything going on there, and is this a good run rate to use going forward?

Yeah, I think that is a good run rate. As you know, we have some tax credits that are built in to that related to some of our CRA projects.

Yeah.

So, I believe that would be a good run rate as far as we know today.

Okay, that's a good run rate. Thanks a lot.

Your next question comes from [Katherine Woodsilow] with TDA Davidson.

My question is about expenses. I realize that Q1 is normally higher, and then you've also got the bankers that you've hired this quarter. So, what can we expect going forward on that? How will Q2 of this year compare with Q2 of last year, say?

Well, as far as the -- by comparison between the two categories -- between the two quarters, we had roughly $300,000 of nonrecurring expenses in the first quarter of '07. That's about $0.01 after tax.

Right.

So, the expenses for benefits and comp, and all the other types of expenses that we talked about would continue to move forward as we've grown that side of the bank to take advantage of revenue opportunities.

So, would Q2 be flat with Q1 of this year, or possibly slightly down?

Well, we're hoping that at least it would stay flat. I can't think of any other major expenses that we would incur in the second quarter that haven't been incurred in the first. So, if we were to be flat or slightly down, that would be the desired result.

Okay. And then sort of a related area, the loan loss provision that you made this quarter was commensurate with your loan growth, so can we expect that to moderate over the course of the year as well?

I think the amount of the provision will be highly correlated to the amount of loan growth.

Okay. All right, thanks very much.

(OPERATOR INSTRUCTIONS) You have a follow-up question from Louis Feldman with Punk, Ziegel & Company.

Hi. Andy, can you talk about -- you know, credit is at the best that it's been in the history of the Company. Can you talk about what you are seeing, what kind of turnover there's been in the problem loan portfolio, and what kind of classifieds you're looking at right now?

Our criticized classified are right now in the -- a little higher than 2.5% range, and that's actually pretty steady with what we saw at year end. So, we've been fairly fortunate so far to be able to churn out whatever we've churned in. I would expect, though, just because we do have a lot of relationships that report to us on an annual basis, that we're going to be discovering here as people are getting at their tax returns and such, that we have some problems. But at this point in time, I really can't say I can isolate any particular segment, any particular market that we see as a weakness. So, I just keep knocking on wood every day I wake up.

Okay. So, is there a reasonable turnover within that portfolio? I mean, stuff is going in, coming out, certainly charge-offs were virtually indistinguishable. Was there any kind of turnover in that stuff that got either refinanced, etc., or reclassified?

I don't know the --

The word is restructured, sorry.

Yeah. I don't know the exact percentage of how many dollars went in and how many dollars went out. I mean, I can get you that.

Okay.

Most of the stuff, actually, that we've had that's been risk coded we've been fortunate enough to rehabilitate the borrowers and simply upgrade them and retain them. We've had very little payoff activity in terms of our risk-coded loans.

We've spent a lot of time developing a culture, I think, that encourages people to, you know, if they're sensing any kind of a problem with the borrower, that they bring it to the attention of the credit administration group to get help for that customer very early on in the problem. So, it hasn't gone to the point of no return. I think that Andy's group has done a phenomenal job in working through problem credit.

I guess the last comment that I would make, Lou, is -- because I can't think of actually the amount that went in or went out, but if you were to look at our watch, our special mention, our subcategories, and if you were to look at them over, say, the last eight quarters, they've gone anywhere from a low of, say, 60 million to a high of 90 million. And so today we're sitting at about on the risk-coded side a little over 2.5%. So, we're closer to the lower end of that range right now than the higher.

Okay.

Does that give you some color?

Yes. Thank you very much.

Your next question comes from Russ Hubberman with Hubberman Fund.

With the two acquisitions you just made, does that take you out of the acquisition game for '07 in terms of having to integrate -- close and integrate them?

You know, I would not want to make a blanket statement that we certainly wouldn't talk to other organizations that might be interested. We're going to be very thoughtful about the partnering of the two organizations that we'll be bringing in over the next couple of quarters, but I wouldn't say that we would not talk to others. I know that's kind of a wishy-washy question -- or answer, but we've got --

No, I'm just trying to get a sense of do you have your hands full, basically, with these two operations?

Certainly, we will dedicate a lot of time and effort to the successful merging of the organizations into Columbia Bank, but we've got, really, a well-seasoned group of people that have worked on acquisitions over the past -- over numerous years, so we've got a pretty well laid out plan.

And, Gary, could you refresh my memory. For the two operations, how accretive will they be over the first year after you close?

We modeled the accretion for both and I think we modeled it for '08. So, as we look at the first full year of Town Center, for example, with Mountain Bank, I think we're probably looking at $0.02 and $0.03.

For both the shops.

Both together, correct.

And would you expect more accretion in years after that?

I think we have -- certainly our goal is to enhance what has been built and to put some -- the products and services that we have to offer. I would certainly hope that would be the case.

We did not model in revenue enhancements, but we do believe that there will be great opportunities for that.

So, really, the $0.02 and $0.03 is more from strictly a cost savings?

That's correct.

Okay, thank you. The best of luck.

There are no further questions at this time.

Okay. Well, thank you all very much for joining us.

This concludes today's conference call. You may now disconnect.