Columbia Banking System Inc (COLB) 2008 Q4 法說會逐字稿

Welcome to Columbia Banking System's Fourth Quarter and Year 2008 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. (OPERATOR INSTRUCTIONS). 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, Jennifer. Good afternoon, everyone, and welcome to Columbia's 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 SEC for the year 2007.

I'm going to assume that you've all had a chance to see our earnings, which were released this morning and which are available on our website. Today, we will provide additional clarity and detail to the information that we already provided in that release and answer any questions you might have.

Gary Schminkey will discuss with you our results for the quarter, including our equity, liquidity ratio, and net interest margin. Andy McDonald will provide you with some additional color related to the allowance for loan losses, our loan mix and credit quality and Mark Nelson will talk about our efficiency initiatives and our lending and deposit strategies. We will then open the discussion to questions.

In our press release, we reported positive earnings for the fourth quarter and for the year; even with the challenging economy, our impairment charges for Fannie Mae and Freddie Mac, and increased additions to our provisions for loan losses.

In our third quarter conference call last year, I mentioned that our underlying banking fundamentals remain sound and I certainly want to stress that today as well. Our core operations continue to be profitable and we are confident that we have the right strategies in place to manage through this business cycle.

Why are we confident? First, we're well capitalized at 14.25% for the end of the fourth quarter and 2008. This includes about 77 million in capital we raised through the U.S. Treasury's Voluntary Capital Purchase Program. We were one of the first regional banks who elected to participate. While we would have been considered well capitalized at 11.25% even before we received the additional equity, the CPP will enhance our ability to lend and increase our flexibility to pursue strategic opportunities which may arise. CPP money is a relatively inexpensive form of capital during a time when it's more difficult to raise capital through more traditional channels.

I'd like to comment here that the Troubled Asset Relief Program, or TARP, has certainly received a lot of media attention and rightfully so. There has, however, been quite a bit of confusion between the Capital Purchase Program component, which was designed to provide capital to healthy banks, and other TARP money used to support troubled institutions, such as AIG, General Motors and Chrysler. We were pleased to have been selected to participate in the CPP Program, as it further affirmed our financial strength.

In addition to our capital, we have ample sources of liquidity to meet the loan and deposit needs of our customers. We have a diverse loan portfolio with over 36% in business loans. Our core deposits are an important reason we have maintained a stable net interest margin. Our core deposits are about 82% of our total deposits and result from the strong relationships we've built with our customers. We have maintained or increased our share of the deposits in most of our markets, and while we continue to improve our efficiencies through some branch consolidations where they make sense, we will never compromise our focus on customer service.

At this point, I want to take a couple of minutes to discuss with you what we're currently observing in the economy and our market. For quite some time, I've been saying that the Pacific Northwest was a bright spot compared to the rest of the country, with the commercial aviation, biotech, software and export industries contributing to the diversification and economic strength in the Pacific Northwest. Recent reports, unfortunately, are confirming that the Northwest has rapidly joined in the steep U.S. economic downturn. We are certainly seeing that no state is immune to the effect of a national recession. Just yesterday, Boeing announced they will cut 10,000 employees this year, or about 6% of their workforce, to protect against the possibility that the economy will worsen. They're focusing on the upside, however. Their CEO is forecasting that the coming year will be stable and profitable and they hope to maintain current levels of their plane production for several years.

On Tuesday, Russell Investments announced that they will cut 20% of its worldwide workforce. Over half of their 2100 people are based here in Tacoma and of course, Starbucks announced it's cutting almost 7,000 jobs and closing 300 more stores. With all of these announcements, we don't yet know how many of these job cuts will truly impact our market areas.

Other challenges are, including slowing exports, and the loss of Washington Mutual and Safeco, with resulting job losses. Housing foreclosures continue to increase, with declines in housing sales and in sale prices for land and lots.

The recent unemployment numbers really tell the story about the rapid decline in the economy. Washington State's unemployment rate jumped to 7.1% in December from 4.6% a year ago and 6.4% in November 2008, the largest one-month increase in more than three decades. The State's jobless rate has nearly caught up to the national rate of 7.2% for December. The Unemployment Security Commissioner for the State said, "In barely a year, we've gone from historically low unemployment to record numbers of people applying for unemployment benefits." The State had 56,000 fewer jobs last month than a year ago and most job losses were in manufacturing, professional, business services, construction and administrative and support services. There were gains, however, in information, education and health services jobs last month.

The picture was a bit better in the greater Seattle area. Unemployment increased from 5.4% in November to 6.2% in December, but still lags the rest of the State and the nation. It's interesting that despite a flagging economy, Seattle is the nation's sixth most popular destination for people moving from outside of the State.

The military is a major driver of Pierce County's economy and of our region as a whole. Recent reports show that the military accounts for more than 43,000 jobs here in Pierce County and nearly 125,000 jobs and $3 billion in payroll to our regional economy as a whole. And that would be in King, Pierce, Snohomish and Kitsap Counties. Last year, Congress earmarked more than $385 million for new construction of Fort Lewis here in Tacoma.

The Port of Tacoma saw less traffic in 2008 and expects volume to continue to lessen as companies react to the economic pressures. Cargo volumes are down as Americans are buying less. The number of cars shipped through the Port is down about 5% from last year and container traffic is down about 2.4%. however, the Port is expressing confidence in a long-term upward trend, but TransPacific, particularly China trade, is predicted to increase up to 60% in the next six or seven years. The Port is developing a terminal for the NYK Line of Japan, which is scheduled to open in 2012, although it will be a less ambitious project than originally planned.

Oregon's economy is still weakening, outpacing the nation's economic downturn with an unemployment rate of 9%, up a full percentage point from a month earlier and from 5.4% just a year ago. The Portland metropolitan area is doing a bit better than the state as a whole, but it's still a gray picture with 8.1% unemployment in December. Oregon's Office of Economic Analysis is predicting the recession to be deeper and lasting longer into the second half of 2009.

Bank of Astoria's six branches are located on the north coast of Oregon, where the picture isn't quite so bleak, although they are seeing the effects of the national recession. [Clatsop] County's unemployment rate was 6.9% in December, but it was still the third lowest in the state and far below the nationwide average of 9%.

The U.S. Conference for Consumer Confidence Index fell to an all-time low in December after a moderate increase in November. The increase now stands at 38.0, down from 44.7 in November. The Conference Research Center says that this further erosion of index reflects the rapid and steep deterioration of economic conditions that occurred in the fourth quarter of 2008. The overall economic outlook remains dismal for the first half of 2009 and only a modest recovery is expected in the second half.

So after all of this, despite all the glum economic news, I have to say that I am confident that a well diversified area of the country will weather the storm better than many other areas of the country. With that, I'd like to now turn the call over to Gary.

Thank you, Melanie. This morning, we announced net income of $1.8 million for the fourth quarter of 2008 or $0.07 per diluted share compared to net income of $7.3 million or $0.41 per diluted share for the fourth quarter of 2007. During the quarter, we made a provision for loan loss of $13 million and had an additional $1 million impairment charge due to our investment in Freddie Mac and Fannie Mae preferred stock. The remaining book value of this stock is now less than $500,000.

Columbia is facing the same economic pressures and challenges as the rest of the banking industry and as Melanie mentioned, our market area's economy is rapidly reflecting the problems the rest of the country is experiencing. 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.

I'd like to review a few of the important points about Columbia's fundamentals. Our estimated total risk-based capital stands at 14.25%, up from 10.9% at year end 2007. Our capital ratios are in excess of the regulatory definition of well capitalized of 10%.

As Melanie mentioned, we participated in the U.S. Treasury's Capital Purchase Program, which has provided relatively low-cost capital to qualified banks. Columbia received $76.9 million in November. This added 3% to our total risk-based capital ratio.

During the fourth quarter, we also filed a Form S3 Shelf Registration Statement, which will increase our capital flexibility and access to capital if necessary, and put us in the position to take advantage of potential opportunities that may arise over the next several years.

The Board declared a $0.04 dividend for the fourth quarter. Given our current market valuation, the Board reviewed our dividend in light of our dividend yield, our payout ratio and our desire to retain capital, and decided to lower our dividend from $0.07 paid for the third quarter 2008.

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 liquidity position is about 34% for over $1 billion compared to [32]%, or just under $1 billion, for the third quarter of 2008. This liquidity comes from the bank's investment portfolio, our borrowing line at the [FHLB] of Seattle, the Federal Reserve Bank repurchase agreement and wholesale funding sources.

We again included a section in our press release for core earnings. We added back the preferred stock impairment writedown and removed the gains and expense recapture of the Visa and Master Card common stock transaction, the gain on securities and proceeds from life insurance received in the second quarter. Removing these items produced an operating or core earnings number for the fourth quarter of $2.2 million or $0.12 per diluted share compared to $8.5 million or $0.47 per diluted share a year ago.

For the year ending December 31, 2008, core earnings were $14.8 million or $0.82 per diluted share compared to $33.5 million or $1.98 per diluted share for the year ending December 31, 2008.

As you know, there were deep interest rate cuts during the fourth quarter of 2008. However, our tax equivalent net interest margin for the fourth quarter increased to 4.39%, as compared to 4.29% one year ago. This increase in net interest margin is especially welcome since over 40% of our loans are tied to the prime rate or other short term index, whose rates have declined tremendously.

The reduction in interest income was more than offset by repricing our less rate-sensitive core deposits, as well as taking advantage of inexpensive funding opportunities, such as utilizing the Federal Reserve Bank and the Federal Home Loan Bank of Seattle.

Average interest earning asset yields have decreased to 5.92% or 129 basis points from the same quarter in 2007. Average interest bearing liability costs have decreased 169 basis points to 1.93% from a year ago.

We have been successful in decreasing the cost of interest bearing deposits by 29 basis points this quarter. The interest reversal on new non-accrual loans in the fourth quarter of 506,000 caused a decline of 9 basis points in loan yields and 8 basis points in our margin. For the year, interest reversals related to non-accrual loans totaled $1.52 million, resulting in a decline of 6 basis points in loan yields and 5 basis points in our margin. We expect the pressure on our earnings to continue as we manage through the problem loans, the impact of the Fed's December rate cut (inaudible) as the loan portfolio reprices and competition for low-cost deposits continues.

Non-performing assets ends the quarter at 3.54% of total assets, as compared to 0.46% at year end 2007. Non-performing assets at December 31, 2008 were $109.6 million and year-to-date chargeoffs were $25 million, compared to $[380,000] for the same period in 2007. The provision for loan losses was $13.3 million for the fourth quarter of 2008 versus $1.4 million for the same period of 2007.

Looking ahead, the increasing lack of stability in the economy makes it likely to see similar additions to the provision that we saw in 2008. Our loans ended the quarter at $2.2 billion, down slightly from year end 2007. Our commercial business loans totaled $891 million, up from $762.4 million at December, 2007.

Commercial real estate loans are up $10.5 million, while consumer lending is up $38 million or 22%. Our commercial construction loans have declined by $84 million and residential construction has decreased $59 million, all compared to year end 2007.

Core deposits declined from 2 billion at the end of 2007 to 1.9 billion at the end of 2008. The decline is centered mainly in CDs, less than $100,000, interest bearing demand and money market account. Some of this decline is from depositors moving funds to government-backed [sweep] accounts and paying down borrowing.

Return on average equity for the fourth quarter of this year was 1.6% compared to 8.63% for the fourth quarter of 2007. Our efficiency ratio improved to 57.62% for the first quarter of 2008 compared to 62.83% during the same period last year. We will continue to work toward achieving a ratio in the mid 50s, but in the near term, we expect additional expenses going forward as we maintain higher volumes of other real estate owned and work our way through problem credit.

Non-interest income for the quarter was $6.3 million compared to $7.2 million for the fourth quarter 2007. However, when you add back the pretax OTTI charge of $1 million for the Fannie and Freddie preferred stock, core non-interest income increased slightly from the same period last year to $7.4 million.

Non-interest expense decreased 15% to 21.8 million for the fourth quarter compared to $25.7 million for the same period last year.

During the fourth quarter of 2007, we established our Visa litigation liability accrual of $1.8 million, of which $402,000 was reversed during the current quarter. On a core basis, non-interest expense declined from $23.9 million in the fourth quarter of 2007 to $22.2 million in the current quarter.

We reported a tax benefit of $1.2 million for the fourth quarter and $4.9 million for the year. The tax benefit is primarily the result of earnings from our tax exempt municipal securities, along with other tax exempt investments, such as bank owned life insurance and affordable housing partnerships.

Historically, we have had an effective tax rate in the range of 27 to 29%. However, in the current economic environment, our mix of tax exempt income to total income is much higher than in the past. It is difficult to provide an effective tax rate range for the coming year because we do not know the ratio of tax exempt income to total income in advance. However, at this time, we anticipate an effective rate of less than 23%.

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

Thanks, Gary. The decline in the housing market in the fourth quarter in the Pacific Northwest was compounded by frigid temperatures and record snowfall during the month of December. The unusual weather, when coupled with the expected holiday slowdown, contributed to a 23.8% slide in pending sales compared to the same month a year ago, according to figures from the Northwest Multiple Listing Service. For the entire quarter, closed sales were down 42.4% from year ago and prices were down 11.3%.

Portland did not fare any better, where pending sales declined 34%. Similar to the Puget Sound region, the Portland area saw closed sales decline 32% and sales prices were down 14% compared to the same period last year.

These statistics are evident when looking at the bank's loan portfolio, which saw an increase of 31 million in non-performing assets. Most of this increase, approximately 18 million, was centered in our for-sale housing portfolio, which accounts for 64% of our non-performing assets.

The second biggest component remains centered in our commercial construction segment. However, the mix has changed a bit. Non-performing condominium construction exposure still remains an issue here and we were again able to reduce our exposure here modestly from 11 million to 9 million during the quarter. however, the effects of the weakening economy and sagging consumer confidence were evident by an increase in retail related, non-performing construction loans, increasing from 3 million to 15 million during the quarter.

Most of this increase is related to one project, where construction is complete. However, leasing activity has not met expectations. As such, this property is not currently producing an adequate level of cash flow to service the debt associated with its development.

We continue to make progress in reducing our exposure to the for-sale housing segment during the fourth quarter. We were able to reduce our loan totals in the one to four family residential construction segment by 27 million, while also reducing our unfounded commitments by an additional 17.5 million. Since its peak at the end of the first quarter of 2008, we have reduced our one to four family residential construction loans by 73 million and our unfounded one to four family residential commitment by 50 million.

To give you a little more color since the peak, we have transferred 3.7 million to OREO, charge off 18.3 million and enjoyed 97 million in payoffs. Of course, the payoffs were offset by 46 million in fundings on existing projects for a net payoff number of 51 million.

So despite the difficult climate we've been operating in, I would like to take a minute and thank our bankers, especially our folks on the special credit and building banker teams, for finding creative solutions to reduce the bank's exposure in the for-sale housing segment.

Within the commercial construction segment, we were able to reduce loan totals by 16 million and unfounded commitments by 5.6 million during the fourth quarter. For the year, we essentially cut our exposure in half in the commercial construction segment. A large portion of this reduction was in our income property construction segment, which now counts for about 51 million of the total 81 million in commercial construction loans, down from 91 million a year ago.

Again, our condominium exposure is in this segment and it accounts for about 25 million as of year end, down from 32 million at the end of the third quarter and down from 36 million at the end of 2007. For the quarter, we charged off 1.7 million on condominium construction loans and the balance was reduced by payments.

As I have done in prior conference calls, I'd like to go over the distribution of our one to four family single family construction portfolio. It is distributed as follows. 26% is located in Pierce County; 37% is located in King County; and 5% is located in Snohomish, and of course, those countries are all in the State of Washington. In total, we have about 68% of our for-sale housing portfolio in Washington State as of December 31, 2008.

The Pierce County market can further be segregated into acquisition and development loans, which make up about 24$ of our exposure in that county, while vertical construction loans account for about 30%, lot loans at 35% and land at 11%. As of December 31, 2008, approximately 48% of this market was on non-accruals.

King County can be divided into acquisition and development at around 20%, vertical construction at 48%, lots at 21% and land at 11%. King County continues to perform better than Pierce County. However, we have placed about 14% of our King County one to four single family construction loans on non-accrual.

Snohomish County again represents about 5% of our total one to four family construction loans. This market can be segregated into acquisition and development at 49%, vertical construction at 27%, lots at 23% and land at roughly 1%. We have placed approximately 4% of this market on non-accrual as of December 31, 2008.

Another 23% of our for-sale housing portfolio [audio gap] Oregon, primarily in the three-county area, Clackamas, Washington and Miltnoma, which collectively make up 11% of this portfolio. This market can be segregated into vertical construction at 39%, lots at 12%, acquisition and development at 44% and land at roughly 5%. We have placed approximately [audio gap] of this market on non-accrual as of December 31, 2008.

Our condominium construction exposure at year end stood around 25 million, as I mentioned earlier, and we have placed 36% of our condominium loans on non-accruals. Most of our condominium exposure remains in the Portland, Oregon, and Vancouver, Washington, market.

Concerning past dues for the quarter, we had approximately 10.4 million in past due loans as of December 31. About a third of these are centered in our one to four single family construction book, with the rest evenly divided between our C&I portfolio, term commercial real estate portfolio and our consumer loans. Since a lot of folks are interested in our C&I book, the past due percentage at year end was 0.27% of all C&I loans. In our term commercial real estate portfolio, the past due percentage was 0.26%.

While we have begun experiencing negative migration trends in both the C&I and term commercial real estate portfolios, the levels remain well within acceptable parameters. Non-accruals in the C&I portfolio were only 0.37 and essentially unchanged from the levels we have experienced throughout 2008. In the term commercial real estate portfolio, non-accruals actually declined from the third quarter and were only 0.39% of the total term commercial real estate portfolio.

However, the negative migration trend cannot be ignored, especially given the current economic climate. The challenges in the for-sale housing market remain substantial and we anticipate these stresses will migrate to related industries. As such, for the fourth quarter, we took a provision for credit losses of 13.2 million, which exceeded net chargeoffs by 6.9 million, resulting in an increase in the provision for loan losses to 1.91% at December 31, 2008, compared with 1.62% at September 30, 2008.

Our total allowance for credit losses as of December 31, 2008, which includes the allowance for loan losses and the liability for unfounded commitment, stood at 1.94% as of December 31, 2008.

And with that, I'd like to turn the call over to Mark Nelson, our Chief Operating Officer.

Thanks, Andy. During 2008, we continued our efforts to improve our efficiencies, as evidenced by our consolidation of three of our branches in Federal Way, Auburn and Longview. We intend further consolidations during the first quarter of 2009, including offices at Sunnybrook in Portland, [Force] Villa near Auburn and our MLK branch in Tacoma. These consolidations make sense because of the duplication, or close proximity of other branches in the same areas, and our ability to reduce staffing and operational expenses, while still maintaining our commitment to customer service in each of these markets.

Also in 2008, we opened a new office of the Bank of Astoria in Tillamook, Oregon, and relocated our Longview branch to a newly constructed facility, which is also serving as our regional training facility for southwest Washington and Oregon. Our facility plans for 2009 include the completion of our new Renton branch and the relocation of our Redmond branch from a small lease facility into a remodeled building in a better location in the downtown core. No other locations are scheduled to open in 2009.

Our lending strategy has remained focused on our core C&I relationships. The nearly $50 million growth in commercial loans during 2008 consisted principally of business term loans and lines, growth in our professional lending specialty and small business loans through our retail system.

On the consumer side, we also experienced $38 million of loan growth in our home equity product, and I'd like to note here that we have tightened our standards considerably during the year, reflecting the decline in real estate values. And also included in that category were overdraft lines and various other consumer term loan products.

Our relationship focus in lending goes to our fundamental organizational values of helping to strengthen our communities and to create jobs. Relationships have also helped us maintain discipline and pricing on both our loan and deposit products, as evidenced by the stability in our net interest margin during the year. Although there has been tremendous competition to bid up deposit rates, particularly in CDs, and to follow the market down as term lending rates have gone down. We have been successful in expanding and building new relationships in spite of this competition by avoiding transactional lending and focusing on bringing value to our existing and prospective relationships, where our main benefit is not only loans, but the core deposit business of these clients.

I'd like to take a moment to talk about core deposits. While we didn't see growth in core deposits in 2008, the numbers don't fully reflect the success we had in helping our large deposit clients address the general concerns regarding account insurance in excess of deposit limits that arose earlier in year 2008. While these funds could have left the bank for other institutions, we were able to proactively move approximately $60 million of clients' balances to our off balance sheet Treasury backed suite product. While the availability of the increased deposit insurance -- excuse me. With the availability of the increased deposit insurance limits, which we now fully participate in, these funds could flow back to the bank over time.

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

Thanks, Mark. To sum up our comments this afternoon, we believe Columbia is in a good position to ride out the current economic cycle, even though this recession may last longer than we had originally expected. The Capital Purchase Program has augmented our already well capitalized position and we have multiple sources of liquidity. We have a diversified loan portfolio and we've been able to attract a healthy core deposit base because of our reputation for delivering excellent customer service. We empower our wonderful bankers as we continue to keep decision-making as close to the customer as possible.

Going forward, part of our strategy for deploying our CPP capital is through opportunities to expand our market share as a result of the inevitable disruption in the competitive landscape here in the Northwest. We have the right people and the right risk management practices and monitoring systems in place, and we continue to take proactive steps to address our challenges. We are disciplined in managing risk in our loan portfolio, as well as in interest rates, and have reduced exposure in the construction lending, while increasing our C&I portfolio.

Expense control and improving efficiencies will continue to be very important in 2009. However, we want to ensure that we have a strong base from which to operate when the economy begins to rebound. Our focus on fundamental banking, long-term decision-making and maintaining strong relationships with our customers have changed and have served -- hasn't changed and has served us very well.

I have great confidence in our future. We believe that our longstanding strategy of maintaining a diversified loan portfolio and a strong retail base from which to build our deposits has, and will, stand the test of time. With the help of our superb team of bankers, we intend to serve our community for a long time to come.

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

And now, Jennifer, will you open the call for questions?

(OPERATOR INSTRUCTIONS). Your first question comes from Aaron Deer with Sandler O'Neill.

Hi, Aaron.

Hi, good afternoon, everyone. I guess maybe start on a high point. The margin has just help up extraordinarily well and I'm still trying to figure out how exactly you guys do it, but it's certainly impressive. Can you talk a little bit about what your expectations are for that going forward, given kind of a competing, I guess, still some downward pressure on loan pricing and some flexibility on the deposit side now?

Before I turn it over to Gary and Mark, I just want to say that we're pleased as well, Aaron, and we've got an extraordinary group of people on our pricing committee that really have worked to maintain our net interest margin. So Gary, maybe you can give a little bit of a perspective on what you see for next year and this year.

Okay. Well, Aaron, we do see -- coming from the conservative side, we do see some pressure on the net interest margin. What we've been able to do over the past several months is to take advantage of some -- of course, our core deposit base and repricing of those, but also on the Treasury side, we've been able to make up some differences in borrowing costs. Of course, our borrowings have come down, but overall, we were able to borrow at some historically low rates which certainly have enhanced our margins over that time. Where I see the pressure coming from in 2009 is from many banks really focusing on core deposits and as that competition heats up.

Okay. and then with the expectation that the credit issues are likely to just spread to other portfolios, can you talk about the strategies (inaudible) to cure loans and get problem assets off the balance sheet, and maybe what kind of pricing you're getting to the extent that you are able to sell the stuff relative to what the loan value of it is now?

Andy?

Yes, we haven't done very many note sales at all to date, so I can't really comment on what the market is actually pricing these assets at. We've resolved most of our issues through -- as I discussed before, either they've -- we've either charged them off or we've gotten payoffs. That doesn't mean that we don't look at, or not considering note sales. It's just so far, we haven't pursued that strategy to its conclusion, so I don't really know where the market is in terms of that.

And then just lastly, if you could provide some details on your 30 to 89 day past dues in each of the different loan categories.

Yes, as I told you before, we didn't really have many issues in our other categories. I think it was 27 BIPS in the C&I portfolio and 26 BIPS in the term real estate portfolio and the rest of the portfolio, there were really no significant changes. So from a past due standpoint, you'll see that detail in the call report and there really isn't anything that will pop out at you.

Okay. That's great. Thank you, guys.

Thank you.

Your next question comes from Joe Morford with RBC Capital Markets.

Hi, Joe.

Thanks. Good afternoon, everyone.

Hi, Joe.

I guess the first will be somewhat of a follow-up to Aaron's, a bit more specific to the retail construction credit that came into the non-performing this quarter, but just be curious about the workout planned for that and do you see much loss content, or how are you feeling about collateral values there in general?

Well, the most recent appraisal we have, which was toward the end of the third quarter, which put us in an 85% loan to value in terms of where we stand on that credit, although I guess my confidence in appraisals these days is declining. So I mean, I guess we feel fairly good about it. It is a recent non-accrual in terms of it occurred very late in the quarter. We haven't really solidified our workout strategy on that. We are working with the guarantor to try to resolve this issue. We believe the guarantor has some capacity and means to do some things to help with the credit, but certainly, we wouldn't have placed it on non-accrual if the situation with the guarantor was not strained. So we need to continue to resolve that and probably have been color for you in terms of the outlook when we get to the end of the first quarter.

Okay. And just along those lines in general, can you talk about your typical underwriting standards in commercial real estate, like LTVs and tech coverage ratios and for construction stuff, any preleasing requirements? In that specific case, it sounds like that fell short this quarter, or for this credit.

Yes, historically, our underwriting was more aggressive than where we are at today. Today, we tend to still be a cash flow lender and based on the property type, we'll lend anywhere from a 120 to a 135 on the product type. So for example, historically on retail, we were probably in the 130 and now we're looking at retail product type at the 135 range. Historically, the preleasing requirement was much less. Today, we're looking for 50% preleasing or more. So the underwriting certainly has changed a lot in terms of what has occurred in the last year or so.

When would you kind of change those standards then? Is that in the last six months or --

Those standards have been migrating upward throughout the course of 2008. We haven't obviously had a chance to -- haven't changed anything in 2009. in terms of the production that we originated in 2008 though, I can tell you from not a construction standpoint, but from the term standpoint, what we now have in our term portfolio, it actually has an average loan to value of around 60% and the average debt service coverage on what we placed into our term portfolio in 2008 has a debt service coverage of 1.7. So our underwriting there, I believe, will serve us well.

Okay. and then just within commercial real estate, can you give us a little bit of a breakdown of that portfolio by some of the major property types, be it office, retail, condo?

Yes, I can do that. Within the bucket, the largest component that we have is industrial warehouse, which is 23% of the total and that's split pretty evenly between owner-occupied and income property. And then the next biggest we have is office, which is about 18% of the pool and that's about -- you've got roughly 60-some-million in the owner-occupied and about 93 million in the income property bucket. The other large segment is retail where we have a little over 100 million of retail; 17 of that is owner-occupied and about 84 is income property because as you could imagine, most income property stuff is -- most retail is income property.

The next bucket that we have of any size is multi-family, which is around 57 million and then after that, you get down to hotel, motels, which is around 56 million. That reflects some of our exposure in Astoria, which is a vacation community and then the numbers get pretty small after that.

Right, okay, thanks. And then lastly, I guess, just how are you feeling about your C&I portfolio in general, given the increase in unemployment rates that you talked about and was there any reserving done for that portfolio this quarter?

Well, we reserve for all of our portfolios in terms of how our model works, so it would be misleading to say that we didn't reserve for the C&I bucket. There are no specific reserves or anything that's identified that would be directly tied to that portfolio. That portfolio has its own loss rates, its own loss given default, probability of loss and all of that. And as that portfolio trends, it will draw more [lack] of the reserve. We certainly have seen some negative migration in terms of our risk code, that is, credits moving from the past to the wash to the special mention and possibly, we've seen some actually move into the substandard categories. We're not so much worried today about the absolute levels as we are worried about the trend.

Your next question comes from Matthew Clark with KBW.

Hi, Matt.

Hey, guys, how are you?

Okay.

Hi, Matt.

I couldn't jot it all down. I don't know if you gave the breakout, but in terms of the for-sale construction, I guess the four categories that we typically try to break out in terms of outstandings and related non-accruals, could you break down that for-sale bucket in terms of the single family vertical, single family lots, land and (inaudible) in terms of dollars, if possible?

Yes, it's about 82 million in vertical, of which about 23 million is non-accrual. We have about a little over 50 million in lot, of which about 17 is non-accrual. A&D, obviously, a weak segment, is 49 million with about 23 million in non-accrual and then the balance roughly 26 million is in land and about 6 million of that is non-accrual.

Okay. and the lack of movement on the lot side is -- that's just people not -- no demand, obviously, taking them down, but I guess, what your expectation is -- is that going to sit just as long as the land?

Some of the change in the lots are -- we actually had loans that were classified as vertical that never got started, so we never funded the dollars to begin construction of the home. And as we've worked out the credit relationships, some of them are due to a reclass, so essentially, the gains that we made, a little bit in the vertical bucket, were at the expense of the lot bucket. And I don't have that mix.

Okay, great. And then on the commercial construction side, which I think you had mentioned was 81 million, we have that breakout in outstandings. The non-accruals there, I think, condo was 9, but the other income producing stuff, the non-accruals and owner-occupied, those two?

Yes, within the -- the non-accruals in the commercial construction bucket are 25 million roughly, almost 26, and you've got about 16, 17 million in the retail, or I mean -- excuse me, I got my numbers mixed up. You got about 14 million in the retail segment and you got about 9 million in the condo segment and then you continue to have the office property in Astoria is about 1.3.

Okay, great. And then the guidance on the reserving, I assume when you mentioned that you had reserved similar to what we saw in '08, I assume that's just reserving; that's not necessarily loss content? When you're taking overall provisioning, are you just thinking reserve build?

Well, hold it. Gary wants to look at something. I guess our methodology in terms of looking at what we're trying to talk about is that we anticipate that the loan -- the provision for loan loss and chargeoffs will continue to be at elevated levels for 2009. Certainly, they'll be a modest build in the reserve, but we have not, in our forecasting, looking forward, we haven't seen -- we're not modeling in a big increase in the reserve relative to total loans.

Okay. Thanks so much.

(OPERATOR INSTRUCTIONS). Your next question comes from Jeff Rulis with D.A. Davidson.

Hi, Jeff.

Hi, good afternoon. Have you guys recently completed a goodwill impairment analysis?

Yes, we have, Jeff. We started one at the end of November and we completed that as of year end, so with no impairment charge.

And along those lines, have you recently completed a safety and (inaudible) exam?

Yes, we have.

Okay. And then switching gears a little bit, I want to just kind of see if you're seeing any indication you're receiving any deposit -- an increase in deposit relationships from any struggling franchises in the region?

Mark, would you like to --

I don't have any specific information on counts of where things are coming from. In the third quarter, we definitely saw some incoming accounts coming from the Wamu environment and there hasn't been any -- actually, fourth quarter, things have been fairly steady in most of our markets here. We are getting inquiries down in the Vancouver area related to the recent Bank of Clark County going away and we are starting to see some activity and inquiries from folks down there. So we may see more of that as the year progresses.

Okay. And lastly as it relates to the Bank of Clark County situation, I guess -- did you put a bid in for that and, yes or no, I guess also, what would be your interest level in a similar transaction going forward?

Well, we wouldn't comment on whether or not we had put a bid in. Certainly, we would be interested in taking a look at many -- the potential of such a transaction from the deposit side.

Okay. Thank you.

You have no further questions at this time.

Okay. Well, thanks, everyone and we're looking forward to a good 2009, or at least we're hoping that the economy is going to look a lot better next year at this time when we have our 2009 fourth quarter conference call. So thank you very much for listening today and we hope to see you soon. Bye.

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