Columbia Banking System Inc (COLB) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Columbia Banking System's Third Quarter 2008 Earnings Conference Call.

(OPERATOR INSTRUCTIONS.)

As a reminder, this call is being recorded.

I would now like to turn the call over to our host, Melanie Dressel, President and Chief Executive Officer of Columbia Banking System. Please go ahead, ma'am.

Thank you, [Jacob].

Good afternoon, everyone, and welcome to Columbia's Third Quarter Conference Call.

Joining me on the call today are Gary Schminkey, our Chief Financial Officer, Andy McDonald, Chief Credit Officer, and Mark Nelson, Chief Operating Officer.

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 the forward-looking statements, please refer to our securities filings, and in particular our Form 10-K filed with the FCC for the year 2007.

I'm going to assume that you've all had a chance to read our third quarter press release sent out earlier today, as well as our September 12th Form 8-K filing about our expectation of a loss for the third quarter due to the impairment of the preferred stock we hold in Fannie Mae and Freddie Mac. This afternoon, we will provide additional clarity and details to the information that we've already provided in that release and the 8-K, and answer any questions you may have.

Gary Schminkey will discuss with you our results for the quarter, including our equity position, liquidity ratio, and net interest margin. Andy McDonald will provide you with some additional color related to the allowance for loan losses, our loan [mechs] and credit quality. We'll then open the discussion to your questions.

In our press release, we reported a net loss for the third quarter primarily due to the impairment charge related to our investments in Fannie Mae and Freddie Mac, as well as a $10.5 million increase to our provision for loan losses. Gary will review the results in more detail a bit later.

Although the volatile economy is certainly challenging, I want to stress that our underlying banking fundamentals remain sound. As you saw in our results, our core operations remain profitable, and we are confident that we have the right strategies in place to manage through this business cycle.

While I outlined the reasons for our confidence in our organization in the press release, I'd like to just take a minute to expand on them now. We are well capitalized at 11.24% for the end of the third quarter 2008. As you have read, we recently filed a Form S-3 Shelf Registration Statement, which should put us in a position to expeditiously seek to raise capital as opportunities arise. We are also evaluating the Treasury's capital purchase program.

We have ample sources of liquidity to meet the loan and deposit needs of our customers, and we have a diverse loan portfolio, and our core deposits are an important reason we have maintained a stable net interest margin.

Columbia turned 15 years old this past summer. Since we began our journey, we have made decisions designed to ensure the diversity of our balance sheet, as well as our markets and our banking team. Our core deposits, which we define as demand savings and money market accounts and CDs under 100,000, represent 83% of our total deposits, and result from the strong relationships our bankers have built with our customers.

We're very pleased that we continue to increase our share of the deposit markets. We have maintained the number one share of the market in our headquarters county. As of the end of June this year, we have over 17% of the market in Pierce County. Bank of Astoria in Oregon has also continued to have the number one ranking in their primary market. And Mt. Rainer bank also holds the most deposits in their primary area on the Enumclaw Plateau here in western Washington.

As I've said many times, we will stay the course, with our focus on diversified loan portfolio funded by very strong core deposits.

The economy certainly continues to be front-page news and the number one topic in the political debates. At this point, I want to take just a minute to discuss with you what we are currently observing in the economy in our markets.

While we're still a bright spot compared to the rest of the country, during the past two quarters, we have seen housing foreclosures increase, as well as double-digit declines in both year-over-year housing sales and in sale prices for land and lots. However, just this week, we heard that the Seattle area's commercial real estate was ranked best in the national as a prospective investment by a national study from PriceWaterhouseCooper and the Urban Land Institute.

Residential construction employment has been declining since April of this year. However, employment and trade, transportation and utilities has risen a modest 1%, and we've seen employment gains in professional, business, education and information services. The statewide unemployment rate rose to 5.8% in September, below the national average of 6.1%, but nearly 30% higher than the rate last September.

The King County -- and that's Seattle's county -- unemployment rate is increasing as well, although it's rising at a considerably slower pace than the rest of the country, and was 4.6% in September. Pierce County's unemployment rate was 5.9% in September, up from 4.5% a year ago.

The Port of Tacoma has seen less traffic this year as companies react to the current economic pressures, particularly high fuel prices and rising unemployment rates. Cargo volumes are down, as Americans are buying less. The number of cars shipped through the Port are down 5.6% from last year, and container traffic is down 3.6%

However, the Port is expressing confidence in a long-term upward trend with Trans-Pacific, particularly China trade, predicted to increase up to 60% in the next six or seven years. The Port is developing a $399 million terminal for the NYK Line of Japan, scheduled to open in 2012.

Although the US Conference Board Consumer Confidence Index rose moderately to 59.8% in September, up from 58.5 in August, the number is still very low, reflecting slower spending habits. In addition, these results did not capture all of the tumultuous events in the financial sector this month, and the Conference Board warns that, until the dust settles a bit more, we will not know the full impact on consumers' expectations.

Oregon's economy is still weakening, mirroring the nation's economic downturn, affected by higher energy costs, general inflation and lower housing prices. The Portland housing market is slow, with home sales, prices and new construction down and the inventory of homes for sale up. However, business construction is still very strong.

Exports, especially those in agriculture and technology, are doing well. Technology accounts for about 40% of the value of Oregon's exports.

I mentioned earlier that our area is still a bright spot in the country. And within the Puget Sound area, there are tangible positives resulting from a diversified economy. Despite Boeing's strike, which we all hope will end soon, they recently received large orders, and Boeing is still predicting to deliver about 30,000 jetliners in the next 20 years.

Microsoft and other tech companies are continuing to hire, although at a slower pace. Washington State still has in-migration, with people moving here for well-paying jobs.

The fact is, while there is no doubt that the economy and the nation and the Northwest continues to soften, we still see growth opportunities in all of our Washington and Oregon markets.

And now, I'd like to turn the call over to Gary.

Thank you, Melanie.

As a reminder, the results for the third quarter and year-to-date reflect the financial consolidation of Mountain Bank Holding Company and Town Center Bancorp, which were both acquired on July 23rd, 2007. The third quarter and year-to-date 2007 financial information includes only partial results of these two organizations. So, comparisons of results requires a more in-depth analysis.

Yesterday, we announced a net loss for the third quarter 2008 of $8.8 million, or $0.49 per diluted share, compared to net income of $9.3 million, or $0.53 per diluted share, for the third quarter of 2007. As we had previously announced, we had a $18.5 million pretax impairment charge due to the decline in the fair value of our $20 million investment in Freddie Mac and Fannie Mae preferred stock. In addition, we made an addition to our provision for loan losses of $10.5 million.

Columbia has faced the same economic pressures and challenges as the rest of the banking industry. Our challenges remain centered on working through our credit quality issues, preserving our net interest margin, and maintaining our well-capitalized designation and our strong liquidity position.

We've talked about the bank's fundamentals in our release. Let's review a few of the important points.

Columbia's estimated total risk-based capital stands at 11.24%, up from 10.9% at year-end 2007. Our capital ratios are in excess of the regulatory definitions of well capitalized of 10%. Last week, we filed a Form S-3 Shelf Registration Statement, which will increase our capital flexibility and access to capital if necessary, and puts us in a position to take advantage of potential opportunities that may arise over the next several years.

As Melanie mentioned, the Treasury's capital purchase program is available to banking organizations and will provide relatively low-cost capital to qualified banks. Columbia's evaluating all of our capital alternatives and may choose a combination of common stock and the capital purchase program as we prepare for growth opportunities.

The Board declared a $0.07 dividend for the third quarter. Given our current market valuation, the Board reviewed our dividend in light of our higher dividend yield, our payout ratio, and our desire to retain capital, and decided to decrease our dividend.

Our liquidity ratio is a measure to track the funds available to meet the loan and deposit needs of our customers and for the general operations of the company. Our excess liquidity is about 32%, or over $1 billion, compared to 28%, or $890 million, for second quarter 2008. This liquidity comes from the bank's investment portfolio, our borrowing line at the FHLB of Seattle, the Federal Reserve Bank, repurchase agreements, and wholesale funding sources.

We again included a section in our press release for core earnings. We added the preferred stock impairment write-down and removed the gains on sales of Visa and MasterCard common stock and proceeds from life insurance received in the second quarter. Excluding these items produced an operating or core earnings number for the quarter of $3.2 million, or $0.18 per diluted share, compared to $8.5 million, or $0.53 per diluted share, a year ago.

For the nine months ending September 30th, 2008, core earnings were $12.6 million, or $0.52 per diluted share, compared to $25.1 million, or $1.51 per diluted share, for the nine months ending September 30th, 2007.

The tax equivalent net interest margin for the third quarter was 4.34% as compared to 4.4% one year ago. As you may recall, over 40% of our loans are tied to the prime rate or other short-term index. The reduction in interest income was more than offset by re-pricing our less price-sensitive core deposits, as well as take advantage of funding opportunities as we saw disruption in the market.

Average asset yields have decreased to 6.13%, or 128 basis points quarter over quarter. Average interest-bearing liability costs have decreased 150 basis points to 2.24% quarter over quarter. We expect the pressure on our earnings to continue as we manage through this economic cycle and competition for low-cost deposits continues.

Interest income reversals for the third quarter were $355,000 net of recoveries. This negatively impacted net interest margin by five basis points, producing a core net interest margin of 4.39% for the third quarter 2008. Non-performing assets ended the quarter at 2.52% of total assets as compared to 0.46% at year-end 2007. Non-performing assets at September 30th, 2008 were 78.2 million. Year-to-date, net charge-offs were $18.7 million compared to $192,000 for the same period in 2007. The provision for loan losses was $10.5 million for the third quarter 2008 versus 1.2 million for the same period in 2007.

Looking ahead, the lack of stability in the economy makes it possible to see similar additions to the provision that we saw in the third quarter of 2008.

Our loans ended the quarter at $2.2 billion, down slightly from year-end 2007. Our commercial business loans totals are $781 million, up from 762 million at December 2007. Commercial real estate loan totals are down $78 million due to loan payoff, while consumer lending is up $30 million. Our commercial construction loans have declined by $68 million, and residential construction has decreased $32 million, all compared to year-end 2007. We continue to maintain a well-diversified loan portfolio.

Return on average equity for the third quarter of this year was a negative 10.1% compared to 12.18% for the third quarter 2007. Our efficiency ratio was 60.34% for the third quarter 2008 compared to 59.23% during the same period last year. We will continue to work toward achieving a ratio in the mid-50s, but we expect additional expenses, going forward, as we maintain expected real estate owned and work our way through problem credit.

Non-interest income reflected a loss of $10.9 million, primarily due to the impairment charge on investment securities. Non-interest expense increased 4% to 23.4 million for the third quarter 2008 compared to 22.4 million for the same period last year. Much of that increase is due to the 2007 acquisitions of Town Center Bank and Mt. Rainer bank.

We continue to closely monitor and control expenses, and have in place many initiatives to reduce overall expense growth while maintaining our commitment to customer service and our overall strategic plan. Some of these initiatives involve working to improve our internal partnerships, market penetration and cross-selling capability of our retail banking and commercial banking groups.

Another example is to improve our technological capabilities to deliver our services utilizing new and more efficient practices. We have also consolidated three branch locations this year. Melanie will discuss this in more detail later.

At this point, I'd like to turn the call over to Andy McDonald, our Chief Credit Officer. Andy?

Thanks, Gary.

The third quarter continued to be a challenge for our for-sale housing loan portfolio as reflected in the market statistics for September, which saw home prices in the Puget Sound region decline 8.3% year-over-year, while close sales were down 22.1% from a year ago.

The weakest market was Snohomish County, which saw an 11% decline and a 29% decline in close sales year-over-year.

With that said, we were able to reduce our exposure in Snohomish County this past quarter significantly, from 30.5 million to 17.4 million, through the execution of our risk management strategy.

In the Portland market, prices were also down 5.8% while closed sales activity was down 26.4%. These statistics are consistent with what we have seen during this cycle. Because the Pacific Northwest lagged the slowdown in the rest of the economy, we have seen a larger drop in sales activity in our region versus the national statistics, although we have seen less slippage in home prices.

As we discussed in last quarter's conference call, we continue to be diligent in reducing our exposure to the for-sale housing segment and made further progress during the third quarter. We were able to reduce our loan totals in the one-to-four family residential construction segment by 45 million while also reducing our unfunded commitments by 7.6 million. In total, our exposure to this segment declined by close to 53 million during the quarter.

Since December of 2007, we have reduced our total exposure in the one-to-four family construction bucket, both funded and unfunded commitments, by 82.5 million. That's roughly 24%. Our goal, again, is to continue to reduce our exposure to this segment of our business.

Similarly, we were able to reduce our exposure in the commercial real estate construction segment. During the quarter, we reduced our commercial construction loan totals by 59.7 million and our unfunded commercial construction commitments by 25.9 million. So, in total, we reduced our exposure by 85.6 million, or 41%.

As of September 30, 2008, 44% of our commercial construction totals were in income property loans, 33% were condominium construction loans, and the balance, or 22%, were in owner-occupied commercial real estate construction loans.

Within this segment, we had approximately 15.8 million of non-accrual loans as of September 30, 2008, the majority of which, roughly 11 million, were condominium construction loans. This figure is down slightly from the number we reported last quarter, which was 13.2 million in non-accrual condominium construction loans. Most of our condominium exposure is located in the Portland, Oregon and Vancouver, Washington market.

So, for the quarter, the increase in non-performing loans was almost entirely due to increased in the one-to-four single-family construction loan segment. This is not entirely surprising. As I have said before, these types of assets are not easily resolved, and will take some time to work out.

However, the rate at which we place new loans on non-accrual was down substantially from the second quarter of 2008. During the second quarter, we added, net of charge-offs -- hold on, I got that backwards.

In the second quarter, we added 41 million net of charge-offs, and, in the third quarter, we added 4.4 million net of charge-offs.

As you might recall, we significantly increased our provision for loan losses during the second quarter, and a large part of that increase was related to specific reserves. Based on our internal analysis at that time, we believed we had a number of loans in which the collateral values were less than the loan amount.

Unfortunately, as we received updated appraisals throughout the quarter, this proved to be true. And so, during the quarter, the majority of our charge-offs were related to collateral-dependent loans mainly in the residential land, acquisition and development portfolio.

So, again, for the quarter, we had net charge-offs of 18.7 million, of which 14.6 million was in the one-to-four single-family construction bucket.

As I have done in prior conference calls, I would like to go over the distribution of our one-to-four single-family construction portfolio. It is distributed as follows - 25% is located in Pierce County, 35% is located in King County, and 7% is located in Snohomish County. In total, we have about 74% of our for-sale housing portfolio in Washington State as of September 30th, 2008.

The Pierce County market can be further segregated into vertical construction at 33%, lot loans at 29%, acquisition and development loans at 30%, and land at 8%. As of September 30th, 2008, approximately 30% of this market was on non-accrual, with most of it evenly split between vertical construction and lot loans.

King County can be divided into vertical construction at 51%, lots at 17%, acquisition and development around 21%, and land at 11%. King County continues to perform better than Pierce County. However, we have placed about 9% of our King County one-to-four single-family construction loans on non-accrual as of September 30th, 2008. Most of these non-accrual loans are vertical construction loans.

Snohomish County, again, represents about 7% of our total one-to-four family construction loans. This market can be segregated into vertical construction at 43%, lots at 2%, acquisition and development at 39%, and land at roughly 16%. We have placed approximately 67% of this market on non-accrual as of September 30th, 2008. These are primarily acquisition and development loans and vertical construction loans.

The remaining 26% of our for-sale housing portfolio is in Oregon, primarily in the three-county area of Clackamas, Washington and Multnomah, which collectively make up 13% of this portfolio. This market can be segregated into vertical construction at 51%, lots at 12%, acquisition and development at 33%, and land at roughly 4%. We have placed approximately 33% of this market on non-accrual as of September 30, 2008.

Vertical construction in acquisition and development again represent the majority of these non-accrual loans.

Concerning past dues for the quarter, you will see in our call report detail we had approximately 13 million in past due loans as of September 30, down from 21 million as of June 30th. Again, most of these are centered in the one-to-four single-family construction segment.

While admittedly the quarter is a bit of good news-bad news, we believe it reflects many of the action steps and strategies we spoke about during our second quarter conference call. We remain committed to reducing the bank's exposure in the for-sale housing construction portfolio. We continue to diligently monitor our for-sale housing portfolio, and believe we are identifying the risks early and appropriately recognizing embedded losses when they become apparent. We will continue to constantly re-assess our collateral position, and we continue to dedicate the resources needed to deal with the challenges ahead.

In this regard, we have added to staff as needed within our special credits department and engaged the use of outside advisors to assist us in determining the best course of action for our largest non-performing asset.

We continue to believe that these risk management strategies and actions are prudent steps for Columbia. While construction lending comprises about 15% of our entire portfolio, more specifically, the for-sale housing component comprises about 11. The balance of our loan portfolio, which makes up 85% of what we do, is behaving consistent with our expectations. Nevertheless, as I have said before, we are continuing to closely monitor the entire loan portfolio for any signs of weakness caused by the slowing economy.

And now, I'd like to turn the call back over to Melanie.

Thanks, Andy.

To sum up our comments this afternoon, we believe Columbia is in a good position to ride out the current economic cycle. We are well capitalized and have multiple sources of liquidity. We have a diversified loan portfolio, and we have been able to attract a healthy core deposit base because of our reputation for delivering excellent customer service.

Our fundamental strength lies in our people. We take a long-term approach to our decision-making, keeping an eye on enduring benefits to our shareholders, our customers, and our employees.

We have the right people and the right risk management practices and monitoring systems in place, and continue to take proactive steps to address our challenges. We have consolidated several branches in our system where we see improvement to efficiencies, while still maintaining customer service at the levels that we pride ourselves on. Our strong retail system now includes 52 branches from 10 counties in Washington and Oregon. Our Tillamook, Oregon, branch is scheduled to open later this year, and we anticipate adding one more branch location in 2009.

We focus on fundamental banking, on our core deposits, checking, savings, money market accounts, and maintaining strong relationships with our customers. The availability of capital is important to our long-term approach as we evaluate alternatives to place us in the best possible position to take advantage of opportunities to expand our company franchise.

As I mentioned before, we celebrated our 15th anniversary this past summer. The foundation of our success is our superb team of bankers who give me great confidence in our future. We are very proud of them and what we have achieved together in our 15-year history.

This concludes our prepared comments. Before we open the call for your questions, I'll remind you that Gary Schminkey, Chief Financial Officer, Andy McDonald, Chief Credit Officer, and Mark Nelson, Chief Operating Officer, are with me here today to answer your questions.

And now, Jacob, we'll open the call for questions.

Thank you.

(OPERATOR INSTRUCTIONS.)

Matthew Clark.

Hi, Matthew.

Hey. Good afternoon, guys.

I couldn't write down all the numbers fast enough. But, can you just give us the dollar figure of for-sale construction non-accruals? I think that you said the commercial construction was 15-8.

Yeah, it's 51.9.

Okay, thank you.

And then, the simple distribution, or the basic distribution, by county within that 51-9 was 25% Pierce, 35% King, and what was Snohomish?

Well, you've got 30% of the Pierce County market, or roughly 17.6 million on non-accrual. You've got 9% of the King County market, which equals about 7.4 or 7.5 million. You've got 67% of what we have in Snohomish County on non-accrual. That's about 11.6. And then, down in the Portland market, we've got about 9.9, or 33% of that market, on non-accrual.

Okay, and that's all for-sale, right?

Yeah, that's all one-to-four families.

Yes. Okay.

And then, in the commercial construction side, you said 11 was condo, the two other pieces being owner-occupied and income property producing. Do you have those two other numbers in terms of non-accruals?

Yeah. I mean, the other two that are of any substantial nature is the office building that we've talked about out in Astoria, which is about, I think, 1.6. And then, we've got a retail project in King County for around 3.3.

Got it. Great.

And then, in terms of allocated reserves to these non-accruals, can you quantify that? Or what types of -- I guess what do you have in terms of reserves set aside for that total construction portfolio? And then, if you can break it down between the two, that'd be helpful.

Yeah.

At this point in time, because we received updated appraisals on pretty much everything that's non-accrual, and we took the appropriate charge-downs, recognizing if they were impaired, our specific reserves on non-accruals now is only about two million.

Okay.

And I think that's evenly split, really, between the residential and commercial. But, I don't remember that off the top of my head because it's such a small number.

Okay.

And then, in terms -- you saw some big drops in the construction balances this quarter, and just curious as to how much of that was just payoffs, you know, stuff maturing, and then how much of that might have been stuff that was resolved. And then, we can get to that resolution bucket in the second.

Yeah.

Well, the decline in the balances is all either because we -- you know, we charged off roughly, you know, 14.5 in the single family, and then a little bit in the commercial construction bucket. But, the rest of it is primarily because they either paid us off or we were able to execute a workout strategy where we were able to pay that loan off with a performing, say, commercial real estate term loan or something else.

And in the commercial real estate bucket, it's a combination of loans either converting to permanent real estate, commercial real estate loans on our books, or people just went elsewhere to get their long-term financing.

Okay.

And do you have any -- I guess what kind of marks did you take on any transfers into [Oriel], which didn't seem to be a big number, and then if you had any short sales in the quarter, what were -- what'd you take in terms of marks there, in terms of person -- .

Well, we didn't really put much into [Oriel], so I don't know exactly what the discount was on that. We did have some short sales, but I don't have that number with me.

Okay.

It was -- the short sales, though, were very minimal.

Okay.

It's not a material issue.

All right. And I -- actually, I think you answered my other question earlier. I'll step back for now. Thank you.

Joe Morford.

Hi, Joe.

Good afternoon, everyone.

Hi, Joe.

Matthew asked a lot of the questions on that construction stuff, and you had great disclosure. So, just had a few others. Can you I guess just quantify what you can raise to the TARP program in terms of preferred capital? And it sounds like you're considering both doing some of that and the common, and any more color in terms of what potential mix you may do and total amount of capital you're looking at? Thanks.

Hi, Joe. This is Gary.

We have roughly 2.6 in risk-adjusted assets.

Okay.

So, the maximum 3% would produce right around $78 million of available TARP capital to us.

Okay.

And how do you kind of weigh that with -- I mean, obviously, that's pretty attractive pricing on that and, you know, weighing that versus the -- so I think you want to do some comment as well.

Right. And I think it makes sense to, you know, if we're going to go for the TARP capital to exhaust that or to have a good percentage of that as part of our total.

Okay. Okay.

There's still a few unknowns that will play out over the next few days, I think. But certainly, we would look at a mix of both as an opportunity.

Okay.

And then, on -- terms of the loan portfolio, going forward, would you be expecting continued runoffs through the next couple of quarters, or are there enough decent lending opportunities, say, on the commercial side, that may offset some of the pay-downs in run-off that you're seeing?

Joe, hi. Mark Nelson.

You know, that's a bit of forward-looking, and I guess we're not in a position to give you specific numbers. But, I'm not concerned that that's going to be anything very significant between now and the next couple of quarters. I think we're getting very close to flattening out. Anything we did see run off would probably be in the form of resolutions of problem credits that we had.

Okay.

We've had a really good quarter of building up our C&I business. You saw in our numbers that we're having growth in that area, and our folks are really focused.

Okay, great.

And then, Gary, the impact of the recent rate cut that we saw on the margin, the 50 basis point cut, where are you expecting that to play out?

Well, as far as the competition for deposits in our market still remains very strong. Traditionally, we've been able to get back about half of the rate cuts that occur fairly quickly. With the [res] coming, with the repricing of certificates of deposit, I would anticipate that we would get a little bit less than the 25 basis points pick-up from rate reductions on our deposits on this one just because the competition is so strong.

Right.

And then, lastly, any color on the tax rate, going forward, Gary?

Well, I think, once we get back to a normalized quarter, whatever that is -- .

Right.

We would still be in the 27 to 28% range, absent any extraordinary type things.

Right. Okay, fair enough. Thanks so much.

Thanks, Joe.

Thanks, Joe.

Thank you.

(OPERATOR INSTRUCTIONS.)

Jeff Rulis.

Hi, Jeff.

Hi. Good afternoon.

Hi, Jeff.

A couple of my questions were asked already, but I guess Andy touched on this a little bit, but I just wanted to kind of get behind the rationale with -- the reserve you posted was a little light of what you charged off. And in this -- given this weakness in the market, if you could just talk about decreasing the reserve in the quarter?

Well, as we go through the quarter, we were able to pretty much go through all of the non-performing assets and get appraisals that would help validate what our collateral values were. And again, as I mentioned before, we had prepared in the second quarter because we felt we were going to end up short with a bunch of loans. And that's why we had a large specific reserve. If you remember, I talked about that in anticipation of the fact that we would have to be taking these charge-offs.

So, I guess I don't look at so much of it as a quarter to quarter thing, but really sort of an assessment of what we could see going all the way back to the second quarter and continuing to play that strategy out through the third quarter.

So, if we take a look at all of the loans right now that we have that are non-performing, we've marked all those down to market that needed to be, and that's roughly, say, a third. The balance of the real estate loans is about another third. All have appraisals today which support what their current balance is.

So then, if you take a look at what our loan loss is relative to the balance of those performing loans, you come up with a coverage ratio of, like, 150 to 160 percent. And so, there's a logic to it, I guess, from how we look at it. But certainly, these are interesting times, and we are sailing through choppy waters.

Okay, appreciate the commentary.

Then, lastly, just the total risk-based capital, that's a bank or holding company number?

That is a consolidated holding company number.

Okay. Do you have the separate bank number, or is it roughly the same?

It's pretty close to the same, within 10 basis points, I believe, say at 11-17, 11-6, something like that. It's pretty close.

All right. Thanks.

You bet.

Thank you.

(OPERATOR INSTRUCTIONS.)

Matthew Clark.

Okay, just one or two quick follow-ups.

Delinquencies looked -- as you said, were down eight million to 13. Can you talk about your C&I customers, though, and what you're seeing as you get updated financials, and if that process has started? And I'm sure it's ongoing, but what you're seeing in terms of income and what they might -- whether or not the income's down year-over-year or not, and just the overall health of your commercial customer base, please.

Sure.

Actually, I've been, I guess, pleasantly surprised so far on how well the C&I portfolio has held up. I really had expected that we would have seen more downward risk migration than we have. I mean, we have seen some, but it's been very modest and nothing that, at this point in time, we're overly concerned with.

But, I continue to believe that the supply chain for for-sale housing, we just I guess have not seen what I had expected to occur. So, I'm actually pretty pleased with what's happening with the C&I book.

Okay.

And I can probably get this with a follow-up phone call, but -- and I think you had given me the non -- the for-sale non-accruals by county. But, I was hoping to get the non-accruals by type, the four types, and I can easily add up the percentages. But, it would be much easier if you just gave me the four numbers.

Yes. We've got roughly 22 million in vertical, 13 in lots, 16 in A&D, and just a couple hundred thousand in land.

Okay.

And I guess the basis for why the land is holding up so well? I guess you have, in terms of outstanding [Z], I think you have around 30, 35 million?

It's closer to 24. We had more land, but the land category was actually an area that we were able to push out and make a big progress in. We were able to get 10 million of land off of our books in the third quarter, and so -- .

How'd you do that? How'd you do that?

We provided incentives for our customers in terms of how we were able to do that.

But, it's off your books. You don't retain the risk. Somebody else?

Correct.

And did you take a loss on it, or not?

No, we did not. In a lot of cases, the land, what we've gone to and helped with are customers is finding something to do with the land other than do one-to-four single family housing. And so, we're able to partner them up with the use of our outside advisors with people who can find things to do with the land, other things to do, and we were able to identify a lot of people who were able to convert their properties from lot-type developments to either retail or commercial or, in some cases, we found municipalities that had interest in acquiring land.

Okay, great.

Thank you.

Thank you, Matt.

Thank you.

We have a phone question from Aaron Deer.

Hi, Aaron.

Hey, Aaron.

Good afternoon, everyone.

Most of my questions have been asked and answered. I just was wondering, though, if -- obviously you guys are having some of your own challenges in the construction portfolio, but, beyond that, you still look to be much better positioned than a lot of other competitors up in your markets with respect to capital levels and liquidity. And I'm just wondering if that's presenting you with some opportunities to take share from other players in the market or pick up lending teams, or if there's other opportunities where you might find a grow, given the environment.

Certainly we've had a lot of opportunities to think through those options and to talk with prospective groups that -- but we really are taking a look at a wide variety of ways to deploy potential capital raises, but we also feel that we want to preserve the capital that we have right now.

And to the extent that additional capital, be it from the TARP or from another offering, if you were to deploy that by means of an acquisition, are there specific geographic markets that you would be most interested in?

Well, we've always said that we want to be a Pacific Northwest regional community bank, and there's still other markets that we're not in yet, and there's some fill-in areas, as well. But, we would -- we're not in eastern Washington at all, and there are some good growth areas there, as there are in certain areas of Idaho. But, right now, we're just looking at a wide variety of areas and options.

Thank you, Melanie.

Thank you.

Matthew Clark.

I don't think so. Thank you. I'm good.

Thank you, sir.

We have no further questions in queue at this current time.

Okay.

Well, thanks, everyone, for being on our call with us today, and we'll look forward to talking with you again next quarter, if not before.

Thank you, ma'am.

That does conclude the call, everyone. You may now disconnect.