Columbia Banking System Inc (COLB) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking System fourth quarter and year 2007 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the conference please press star, then zero. And as a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Melanie Dressel, President and Chief Executive Officer of Columbia Banking System.

Thank you, Jason. 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 this morning and which are available on our website. Today we're going to briefly review our 2007 performance, talk a bit about the economic factors driving both in our market, and discuss our strategies going forward to expand our franchise and build shareholder value.

Joining me on the call today are Gary Schminkey, our Chief Financial Officer, Mark Nelson, Chief Banking Officer, Andy McDonald, Chief Credit Officer, and Kent Roberts, Human Resources director. After our discussion, we'll give you the opportunity to ask us 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. For a full discussion of the risks and uncertainties associated with forward-looking statements, please refer to our securities filings and in particular our form 10-K filed with the FCC for 2006.

In 2007, we reached several important milestones: over $3 billion in assets, $2.5 billion in deposits, and over $2 billion in loans while maintaining a very healthy diversity in our portfolio. Through the acquisitions of Mountain Bank Holding Company, headquartered in Enumclaw, Washington and Town Center Bankcorp, headquartered in Portland, Oregon, we expanded into important strategic markets for us.

As most of you are aware, our focus has remained in being a community bank. By this mean concentrating on the banking businesses, the business owners, and the employees. To this we have added a broad geographic branch network that allows us to maintain a high level of checking, savings, and money market accounts which we classify as our core deposits.

Staying focused on these core strategies and continuing to strength relationships with our customers by providing the best service possible has helped us to meet the competition coming from other financial institutions, as evidenced by our deposit growth.

Our total deposits grew 475 million, or 23%, from 2006. Not including the deposits brought in by our acquisitions, we actually had deposit growth of over 8%. Core deposits are very a solid 67% of total deposits. We had strong growth in our loan portfolio as well, 34% for the year.

Approximately half of that loan growth came from our acquisitions and half through organic growth. We've also strived to maintain a well-diversified loan portfolio which we believe will help us to minimize both interest rates and economic risk. We remain committed to this strategy; however, we do have approximately 40% of our portfolio with [floating rate loans that are floating rate loans] and in a declining rate environment we do see pressures on our margin.

In the past few years, we've had historically low levels of non-performing assets. The increase in the provision for loan losses from a year ago reflected growth in our loan portfolio. Our provision for loan losses for the fourth quarter was $1.4 million, an increase of 14% from the third quarter of 2007, and a 48% increase from the fourth quarter of 2006.

For the quarter, organic loan growth was 70 million, an increase of almost 13% for the fourth quarter and for the year, organic loan growth was 287 million, which was an increase of almost 17%.

The pre-expected non-performing assets did increase during the fourth quarter of 2007 and were at 14.6 million at year-end 2007 compared with 10.4 million at the end of the third quarter of 2007 and 3.5 million at year-end, 2006.

Non-performing assets increased 4.2 million during the fourth quarter of 2007 compared with the third quarter of 2007, although approximately half of that 4.2 million was a single credit.

We expect our non-performing assets to increase moderately over the next several quarters as economic conditions play out. Along with the rest of the country we are seeing some stress in the residential real estate-related lending as the housing market slows. As the economy of the Pacific Northwest changes, we will maintain our prudent approach to credit quality and expect to add to our allowance for loan loss as appropriate to ensure that we maintain adequate reserves.

As of December 31st, Columbia's ratio of non-performing assets to total assets was .46% compared to .14% as of December 31st, 2006, which is actually the lowest percent in our 14-year history. The ratio of the allowance for credit loss carried in loans was 1.17% at December 31st compared to 1.15% at September 30th, 2007, and 1.18% at year-end, 2006.

To recap our credit quality, while non-performing assets increased during the fourth quarter, that growth was moderate. Net charge-offs were at 380,000, or just .02% of total loans for the full year, reflecting our proactive approach to early identification of problem credit and managing them toward a positive outcome.

While no one can predict the impact of a slowing economy, we're confident in the continuing expertise of our experienced credit administration team and have the initial benefit of a very seasoned special credits team to manage our problem credit.

We're very committed to maintaining our well-diversified loan portfolio and as always we'll be prudent in our approach to credit quality.

At this time, I'd like to spend just a little bit of time on the regional economy of the Pacific Northwest. While we're certainly not immune to the slowing and the housing market weakness we've seen in the national economy, the Pacific Northwest actually remains one of the bright spots in the country.

I'll begin with Pierce County. It's our largest market and accounts for about 2/3 of our deposit base and contributes significantly to our growth. The Tacoma-Pierce County Chamber of Commerce recently released an annual forecast and review of 2007 based on the Pierce County economic index, a broad measure of real economic activity.

Shipping, warehousing, and trade growth have slowed as a result of the weakening value of the dollar, uncertainty over the U.S. trade deficit, and slower economic growth in both Asia and Europe. Interest rate concerns have started to slow the housing and construction markets, which have been stronger than we've seen in other parts of the nation.

Pierce County is seeing slower growth, but growth nonetheless. The economic index forecasters, Dr. Bruce Mann and Dr. Douglas Goodman, who are both professors of economics at the University of Puget Sound, are predicting that economic activity in Pierce County will improve during 2008, although it will still be below the 2.7% loan run average rate of growth we've seen in the last few years.

The forecasters predict that the county's economy will actually grow by 2.3% in 2008. Even with a slower-than-anticipated growth, the local economy expanded in 2007, generating enough new jobs to keep the local unemployment rate from increasing. An improving manufacturing center will compliment strong activity in the commercial real estate sector to form a solid base for accelerating growth in the coming years. Military spending increases and growth from the Boeing company's continuing operations will add impetus for growth.

The Port of Tacoma saw moderating trade activity last year. Their growth rate was flat in 2006 and actually decreased by 5% in 2007. However, we anticipate increases in containerized shipping activity of over 4.5% as well as increases in international activity and domestic shipping.

The NYK Line of Japan has selected the port of Tacoma to expand its container terminal operation. The port will develop a $300 million, 168-acre container terminal, which is scheduled to open in 2012. This will bring construction jobs, new permanent jobs, and new business opportunities for our region.

If you're interested in more information, this report is available at www.tacomachamber.org.

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 have eight branches throughout King County, which is where Seattle and Bellevue are located, accounting for about 18% of our deposits. However, with only 1% market share currently we certainly see many opportunities for expansion.

At our recent economic forecast event, Dick Conway of Puget Sound Economic Forecaster newsletter says the Seattle area economy is due for a good ride in 2008. His reasons? He believes we won't experience a national recession, the world economy is expanding, and the dollar is weak, which helps the overall Pacific Northwest economy.

Washington's largest employers, such as Boeing and Microsoft, are hiring, and the area still has a high rate of in-migration, creating a need for housing and other services.

According to the state of Oregon's Department of Economy Analysis, the Oregon economy is slowing following four years of rapid growth. One of the brightest spots in the Oregon economy was in the durable manufacturing in metals and machinery with strong exports of these goods.

While there is no doubt that the economy in the nation and the Northwest is softening, we still see strong growth opportunities in all of our Washington and Oregon markets.

At this point I'd like to ask Gary Schminkey, Executive Vice President and Chief Financial Officer, to review some additional financial highlights.

Thanks, Melanie. Good afternoon, everyone. Today we announced earnings for the fourth quarter of 2007 of $7.3 million or $0.41 per diluted share, compared to net income of $8.3 million or $0.52 per diluted share for the fourth quarter of 2006.

In general, we certainly faced the same economic pressures and challenges as the rest of the banking industry. Particularly, our challenges are centered on gathering low-cost deposits, maintaining acceptable credit quality, and preserving our margin with declining short-term interest rates.

I need to mention that the results for the fourth quarter and for the year reflect the financial consolidation of Mountain Bank Holding Company and Town Center Bankcorp, which were both acquired on July 23rd, 2007. The fourth quarter and year-to-date 2006 financial information does not include the results of the two organizations, so comparisons of results between the two years usually requires a more in-depth analysis.

Due to the recent decreases in short-term interest rates, we expect accretion to earnings for these acquisitions to take longer than expected.

I'd like to begin my discussion with the most visible operating reason for the decline in net income quarter-to-quarter, net interest margin. Declining short-term interest rates have impacted our net interest margin. The net interest margin decreased 11 basis points from the third quarter, currently 4.29%, versus 4.40% last quarter.

The net interest margin decreased to 4.35% for the full year 2007 compared to 4.49% for 2006. As many of you know, about 43% of our loans are tied to short-term indices such as prime and LIBOR. One basis point in the margin equates to about $260,000 per year, so assuming no other moving parts, the year-over-year before-tax impact of the 11-basis-point decline in margin would be about $2.9 million or about $700,000 for the quarter.

Also impacting our margin 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 borrowings and wholesale deposits. Average asset yields have increased to 7.21%, or 16 basis points quarter-over-quarter, while average interest-bearing liabilities have increased to 3.62% or 26 basis points quarter-over-quarter. We expect the pressure on our earnings to continue as competition for low-cost deposits remains intense in our market.

We recently made the decision to sell our interest rate floors. If you remember, in March of 2006 we purchased interest rate floors with a $200 million notional amount with strike rates [laddered] prime rates of 7.75, 7.5, and 7.25. We paid roughly $3.1 million for the floors in 2006. In January of 2008 we sold the floors for $8.1 million. The gain will be amortized over the remaining amortization period of the hedge with about three years remaining.

The decision to sell was based upon what we felt was favorable pricing where the prime rate would have to average roughly 5.5% over the remaining life of the hedge to break even on holding the floors over their remaining term. While interest rates are currently declining rapidly, we felt the likelihood of the prime rate averaging 5.5% and below for an extended period of time is low, so we elected to monetize their current value.

We were pleased with the growth in our loans, particularly during the latter part of the year. Our loans ended the year at $2.3 billion, which was an increase of 34% or $574 million from December 31st, 2006. If we remove the effect of the mergers in July, loan growth was $287 million.

Of the 574 million in total loan growth, approximately $177 million of the growth came from residential construction and $50 million was related to commercial construction loans. We also grew commercial business loans by $144 million and commercial real estate by $165 million.

As you can see, our growth is spread among most loan categories consistent with our desire to maintain a well-diversified portfolio. Our total real estate construction loans, both residential and commercial, have increased to 19% of total loans from 9.4% of total loans over the past five years. We had tremendous loan growth in the latter half of the fourth quarter. While we certainly appreciate loan growth, the timing of the growth reduced earnings by approximately $500,000 pre-tax due to the provision for loan losses resulting from the loan growth.

While we have incurred the expenses to generate these new loans, including an appropriate provision for loan losses, we won't begin to realize their full-quarter earnings benefit until the first quarter of 2008.

Return on average equity for the fourth quarter of this year was 8.63% compared to 13.28% for the fourth quarter 2006. Excluding our Visa USA litigation accrual, our return on average equity was 9.98%. The lower return on equity is a result of our recent acquisitions. Removing the effect of our third quarter acquisitions, tangible return on equity was 13.08% for the fourth quarter, 2007.

Our efficiency ratio was 62.83% for the fourth quarter 2007 compared to 57.41% during the same period last year. The efficiency ratio is very much affected by revenue growth as well as by expense growth. Our investment in the future growth of Columbia has caused the efficiency ratio to climb. That has the effect of declining short-term interest rates.

We can't control the interest rate environment so our best opportunity to improve our efficiency ratio is through expense control. We are not happy with an efficiency ratio above 60% and we'll continue to work toward achieving a ratio in the mid-50s while balancing our growth opportunities.

Non-interest expense grew by $7.1 million for the fourth quarter 2007 over the same period last year. Compensation costs accounted for roughly $2.5 million of that total along with the Visa USA litigation accrual of $1.8 million, $1.3 million in other expense, and $600,000 related to increased occupancy costs resulting from the two acquisitions along with our expansion efforts within the King, Thurston and [Whatcom] county markets.

Of the total increase in compensation costs, increases in our lending and retail functions accounted for roughly $2.1 million of that, or 84% of the total increase. The increase in lending and retail banking staff reflect our investment and the future growth of the organization. Other expenses increases center around supplies, charitable contributions, and increased FDIC insurance assessments, non-recurring supply expense of approximately $100,000 resulting from the acquisitions, as well as the rebranding of the Bank of Astoria.

Charitable contributions increased $106,000 due mostly to timing as our corporate giving policy has remained relatively unchanged during the past several years. FDIC insurance assessments represent over 21% of the increase in other expense. During 2008, we anticipate our FDIC assessments will likely exceed $1.5 million.

The increase is the result of the FDIC's recent change to their assessment process and our growth. We continue to closely monitor and control expenses, and will undertake many initiatives in 2008 to reduce overall expense growth while maintaining our commitment to customer service and our overall strategic plan.

As I said before, year-over-year comparisons of expense categories are difficult due to the acquisitions. The two organizations are fully integrated into Columbia and the ability to distinguish standalone results is no longer practical.

Lastly, our federal income tax expense was 24.1% for the fourth quarter and 26.6% for the full year of 2007. The tax rate for 2007 was influenced by a tax credit, municipal security earnings, and various CRA programs. Going forward, we expect these adjustments will have less of an impact on the calculation, increasing the tax rate to 27% to 28% of pre-tax income.

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

Thanks, Gary. We recognize that we're operating in a challenging economic environment. 2008 will undoubtedly be a challenging year, with continued pressure on net interest margins, profitability, and increased competition for both loans and deposits.

Although we feel that the Pacific Northwest economy is growing better than many other parts of the country, we will still be faced with the reality that we will need to manage our expenses more aggressively and to be disciplined in the investments we make in 2008. This will most likely see us holding back somewhat on additional branching, although we have communities in which we will continue to work to lock up future branch locations.

As we see it today, we expect to open only two new branch locations in late 2008 or perhaps early 2009. We can't control the interest rate environment, as Gary said; therefore, expense control by our staff will be a critical factor in our success this year.

We continue to challenge ourselves as we look for additional ways to control expenses and maximize efficiency. Our employees are participating and engaged in these efforts in helping us to leverage the investments we made in people and in infrastructure.

The single largest initiative will be continuing to grow core deposits to provide a lower base of funding for our loan growth. We obtained the number one share of deposit market share in Pierce County and Bank of Astoria continues to enjoy the number one deposit market share in Clatsop County. In their primary market on the Enumclaw plateau, Mt. Rainier Bank has the highest share of the deposit market as well.

Our Columbia bankers are the foundation for that success as we strengthen and enhance our relationships with our customers. Just last week, KOMO, a Seattle television station, reported on the results of a customer service survey about local banks conducted by Consumer Checkbook magazine, which is a nonprofit group that surveys local consumers about various services.

Columbia Bank was rated superior overall by 93% of our customers who responded to the survey. In order to maintain these results, we need to be able to attract and retain the highest-quality team members. In 2007, Northwest Jobs announced that Columbia bank was named as the favorite local large company in Pierce County, and we were also selected by the Puget Sound Business (inaudible) as one of Washington's best workplaces. We're very proud of those honors.

Despite the challenges, we feel we are in a very good position to ride out the national economic storm. Our diversified loan portfolio and strong core deposit base are basic to our strategy. We remain committed to decision-making that will benefit our customers and our employees and our shareholders.

We look forward to our 15th anniversary this summer and believe we are well positioned for success in the coming years.

We hope to see many of you at our annual meeting, which will be held at 1:00 on Wednesday, April 23rd, at the Greater Tacoma Convention and Trade Center.

This concludes our prepared comments. Before we open the call for your questions I'll just remind you that Mark Nelson, Andy McDonald, Gary Schminkey, and Kent Roberts are with me to answer your questions.

And now Jason will open the call for questions.

Thank you, ma'am. At this time I would like to remind everyone that in order to ask a question, please press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

And your first question comes from Matthew Clark from KBW.

Hi, Matt.

Hey, good afternoon. Can you first maybe touch on your non-performers? I guess maybe an update with a couple that emerged in the second and third quarter, I guess the one out of Bank of Astoria I guess was about 1.9 million and then you had another 4.9 million coming in the third. I think that was the (inaudible) permitting done in time.

And then I guess the additional $4 million incremental increase this quarter, if you could just break that down for us.

Sure. I'll have Andy answer that.

Yes. The new one we put on is a condo project down in [Cammis], Washington. Actually townhouses, to be more specific. We do have an appraisal that we just got here in January that indicates that we're still okay from a collateral position. Right now, it looks like that one will probably go through foreclosure, so we'll either have to sell the note or take possession of the property and then sell the property in that manner. But at this point in time, it doesn't look like there's any loss potential in that project, based on the appraisal.

What's the size of that project?

That's a $2.4 million loan. And the project, of course, is larger than that. I think the overall project size, if I remember, was somewhere in the neighborhood of the low threes. So there's equity in the deal and the appraisal indicates that even today, there's still equity in the deal.

And how far along is that project?

Most of it's complete. There's a small portion that still needs to be done. Basically it's 14 town homes, a single family residence, and a duplex. And I believe the duplex still needs some work.

Okay. Okay.

The lot development loan which we had, that's the 4.8 million, that's the largest of the non-accruals that we have, that's 105 lots out in Graham, Washington. That has now received plan approval, so that's a positive, that did occur the first part of this year. Again, we have a recent appraisal which puts us in okay, we don't have a lot of collateral there, but we were able to enter into a forbearance agreement.

We were able to get a small reduction, we were able to get the interest reserve funded. We also picked up about 1.2 million in other collateral, of which $1 million now has a purchase and sale agreement which we can come in and use to reduce that balance.

So we have a pretty good guarantor on this one that has some resources and is able to make some things happen, so we're feeling fairly good about this one, despite the size of the non-accrual.

And your timing there, in terms of results in that issue?

I don't think it's going to be a quick resolution. I think with a lot of these residential workouts it's going to take some time and patience. But I would say that by the time it got to the end of this year, that would be substantially reduced.

The one we have down in Astoria, we did chart that down 400,000 against the capital access program that they have down in Oregon. I don't know if you're familiar with that. So that actually works out pretty favorable to us, and so now that's been reduced to around 1.6 million.

Again, we got an appraisal in hand that shows that we got a lot of equity in that. We did enter into a settlement agreement with the borrower that gives them I think it's through the end of March or the early part of April to sell the building. If not, we'll have to take ownership of the building and then sell it ourselves. But again at this point in time, we don't see any loss potential in that.

So for the problems that we've identified so far, it looks like we're into the project okay and if we are just patient and work our way through them, we can avoid loss.

Okay, great. And then the group that you brought on board from a competitive hire, [I guess from a] banking world, I guess they probably came on late in the year and may have contributed to that year-end growth in loans. But I assume those guys aren't profitable yet, is that the case? And how much business have they brought over?

I'll let Mark answer that one, Matt.

Matt, before we bring anybody on we do business modeling and we actually use that as a budget for judging how quickly, I guess, they become accretive to us. We expect them to be accretive by the end of March. Our process, we brought on three professional lenders and they became part of our east side private banking team.

Their focus is on medical, dental, and other professionals, and right now, they have brought us on approximately $5 million worth of assets. And again, they tend to be slightly better priced than our typical commercial loan.

Great. And then finally, I guess what have you changed in the last quarter or two as it relates to booking new residential construction projects? As I said, what are you're going to change about the process there, if anything?

Andy?

Well, actually right now we're not very aggressive at all a looking at any residential new construction at this time. So from that perspective, we're just trying to take care of the customers that we have and the commitments that we've made, and we're not looking to bring on any new names or new relationships.

Okay, that's all I have. Thank you.

Your next question comes from Jeffrey Rulis from DA Davidson.

Good afternoon.

Hi, Jeff.

Within the non-interest income line, other income of the 978,000 I've found fairly sharply from 1.3 million in Q3. Can you explain the move there, what was Q3 at before?

Gary?

Hi, Jeff, this is Gary. The other income line includes things such as international fees, stand-by letters of credit, slot fee income, and so on. We did have an up tick in slot fee income in the third quarter, and that trailed off somewhat into the fourth quarter, along with some prepayment penalties that we also had in the third quarter, as well.

So third quarter was loaded up a little bit in the slot fee and the prepayment penalty area.

So that in a normal quarter, around $1 million is --

Yes, yes, I wouldn't anticipate the third quarter to be a guide. Probably the fourth quarter will be more indicative of where it typically would be.

Got it, okay. And would you book the gain from the interest rate contract sale through the non-interest income?

No, we would book that along with our hedge into net interest income.

Okay, okay.

And in fact, the cost of the floors are still there, so we amortized that cost along with our gain. So as if the hedge was still in place.

Right, okay. Okay. And then I don't know if you have a number on the foregone interest from the loans you put on accrual, what that amounted to and maybe if you could speculate on how much of the 10-basis-point margin drop was due to interest you didn't collect on the non-performers.

I don't have that with me right now, I think the increase in the non-accrual, if I'm correct, Andy, came toward the latter part of the fourth quarter.

Yes, exactly. The $2.4 million loan which is default or the increase in non-accrual was placed on non-accrual in December so it wouldn't have had a material impact even though we could get that number for you, though.

So did this (inaudible) the material amount, Jeff?

Got it. The 10-basis-point drop is pretty core, then, it's not a --

Yes.

Okay. And then lastly, you said that you got about 40-some-odd percent in floating loans. Any percentage of those with floors?

Not to my knowledge. Typically, Mark can expand on this, but typically, it's my understanding that we just don't add the floors into the loan document. The market is so competitive it would be hard to enforce those floors, where they would just go somewhere else.

That's correct, there is not a significant amount that would have a floor built into that.

Okay. That's it for me, thanks.

Thanks, Jeff.

Thanks, Jeff.

Your next question comes from Aaron Deer from Sandler O'Neil.

Hi, Aaron.

Hey, good afternoon, everyone. Just bouncing back to the credit discussion, I was wondering if you could give a sense of what's going on with trends on past-due credits.

Sure. Our trend on past-dues, actually, in general, they're still very much near the historical norm. When we bought Town Center Bank, they have historically had a higher level of past-dues than Columbia Bank did. So we do have an overall elevated level because of that, but when you separate out the Oregon division is how we look at it now, and you just look at the core Columbia operations, it continues to perform relative to historical standards.

So, and we're working with the Town Center people to get them to be more in a line with historical Columbia Bank ratios.

If you looked at where you stood at September 30th versus where you are at year-end, have those numbers changed significantly?

You mean from 12/31 to today?

From 9/30 to 12/31. Or to today, for that matter.

Hang on, I have that number. We were at about 40 [bips] in September and we're at 60 bips in December. But we fluctuate up and down. You know, 50 bips is kind of our goal, and we fluctuate up and down around that. So I wouldn't necessarily say that December's numbers indicate an increase in trend.

Yes. Okay, and then the comment on the change in other income, I was wondering, there was also change in other expenses. It seemed like that was a little outsized this quarter relative to where it's been in the past. Gary, I was wondering if you could give us a sense of was there anything unusual there?

Well, I think I touched on it a little bit, as far as the other expense category being the FDIC insurance that we had to accrue in the fourth quarter.

Yes.

Our credit's fairly good -- they were used up probably in the late third quarter and we started accruing, so about 21% of that increase is just the FDIC expense that we began to accrue in the fourth quarter.

The other expenses that you see in that category, there's much of it related to the conversion that we had for our acquisitions. We did three conversions last year so the expenses of doing that, along with, you know, having systems people be on-site and so on were mixed in there, so. And I guess also providing additional printing and supply envelopes and everything else named Columbia.

The 4.4 million that we saw then in the fourth quarter, that would be outsized, then, relative to what you'd expect going forward.

Well, it's outsized in relation to the acquisitions, but given that we're going to accrue or expect about $1.5 million in '08 for FDIC insurance premiums, that would be in addition to that.

Right.

So if we get to the base and add 1.5 million, that's where we'll be.

Okay. That's it. Thank you.

Thanks, Aaron.

Your next question is from Joe Morford from RBC Capital Market.

Good afternoon, everyone.

Hi, Joe.

Hi.

I apologize in advance, you've touched some of this already, but I guess first just following up on expenses, talk about doing what you can to control things there given the rate environment. If you look at kind of your core fourth quarter run rate here, excluding the Visa costs, and you fast-forward a year from now to fourth quarter '08, what kind of annual growth are you hoping to limit that to?

Joe, we have several initiatives that we're working on for 2008 to really keep our non-interest expenses in line and in some cases reduce the level in certain categories. And not all fully quantified yet, but we've developed a plan and I guess at this point it's a difficult question to answer until we get further along with that process.

Although I think that if you looked at the base amount and almost not counting growth, I would expect that we would have no growth if expenses are slightly reduced.

Okay.

If any of our plans were successful.

Okay.

Yes, I mean, we did talk about the FDIC insurance.

Yes, no, absolutely, sure.

Yes, and that's something we certainly can't do anything about.

No, --.

So I think we have initiatives to offset that and more. It's just a matter of the timing of when those initiatives materialize.

Okay.

One of the things that we did this last year was invest in people, and we had the opportunity to hire some people who just really bring a dynamic expertise in certain market areas that we were very interested in. In light of economic situations, today we probably wouldn't be as aggressive in bringing on as many team members. I want to hedge that a little bit just from the standpoint that we have the opportunity to talk with a lot of people.

And if it was just really a compelling reason to make an investment, we wouldn't discount that. But I just don't see that as being a big a factor this year, so that would play to Gary's comment about keeping expenses flat.

Right, okay. That's helpful. And then I guess the other question was just on the margin, recognizing that you talked about some of your floating rate exposure and the challenge of the rate environment. What kind of outlook do you have for the margin this year, Gary, be it for '08 as a whole or even just in the first quarter based on the rate cuts we've already seen and likely to prospect for more next week?

Well in the fourth quarter, we had the effect or the -- not the full effect of 100 basis points, but the effect of the decreases in the fourth quarter produced, you know, 10, 11-basis-point decline in our margin.

Going forward, we're already at 75 basis points and your guess is as good as mine as to whether we'll have any more of that. But I would anticipate that the effect of rate decreases, any further rate decreases, would have more of an effect. And only because at some point, deposit costs will have some type of a minimum that would be dictated by the market as those deposits are very competitive.

So there's going to be a limit to how far we can reduce deposit costs, and so if we had another -- so for example, another 100-basis-point decline, if that happened in the first quarter, it could essentially see a little more than the 10 or 11-basis-point decline in margins.

Right. Okay, that makes sense. Thanks very much.

Thanks, Joe.

Thanks Joe.

Your next question comes from Russ Hubberman from Hubberman Fund.

How are you all?

Hi, Russ.

Hi, Russ.

I got on a little late. Melanie, I just had a quick question. Are you out of the acquisition mode for the time being, or had you addressed that issue?

I did not address that issue, and I think that the only appropriate way to answer that is, you we'll continue to talk with potential partners that make sense, but you know, it's a little difficult in this market to find a lot of opportunities to do it correctly, so.

Because your currency is down as well as everyone else's, or?

Yes, exactly.

Or and potential acquisitions don't want cash?

Yes, I think that every organization is a little bit different and they all have their own perspective on how much cash and stock they would like to have.

Just one other question. The Tacoma market per se, in terms of loan demand. Would you say it is softer than Seattle proper? How would you describe it today in terms of commercial loan [to mint]?

Mark?

Yes, I would break that into a couple of categories. On the commercial side, we're still seeing some pretty reasonable demand. We're a little more cautious on looking at those projects that would have a retail aspect to it. On the residential side, I would certainly say that our market here is a bit softer than Seattle, although we have not seen big price declines.

That has continued to appreciate, so definitely a bit more softness because we're a little bit more outlying, but still positive trend.

Thank you guys, the best of luck.

Okay, thank you.

Your next question comes from Sara Hasan from McAdams Wright Ragen.

Hey, everyone.

Hi, Sara.

I was intrigued by your announcement about the Bellingham branch, and I was wondering if you could talk about how that came about.

Sure. This was another situation where we had a group of very experienced, well-known bankers in a market that we had identified as wanting to enter at some point in time approach us, and they're just an excellent group of people.

We had identified Bellingham as -- we did a study not too long ago about what part of the Pacific Northwest we would like to eventually have branches in, and Bellingham matched the demographics and the growth opportunities that we were looking for.

And when this group contacted us, we just felt that it was a great time for us to make that investment. We always try to build our branches around people who are known as the market-makers for their market, and we try to be flexible so that we don't (inaudible) so much on a timeline as to when and where we're going to open their branches that we miss opportunities to really pick up those stellar bankers.

Thank you.

You're welcome.

Once again, for any questions, please press star, then the number one on your telephone keypad. There are currently no further questions.

Okay, well, thank you so much for your time this afternoon. Bye.

That concludes this afternoon's teleconference. You may now disconnect.