Columbia Banking System Inc (COLB) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's first quarter 2009 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, Crystal.

Good afternoon, everyone, and welcome to Columbia's conference call today. Joining me on the call today are Gary Schminkey, our Chief Financial Officer; Andy McDonald, Chief Credit Officer; and Mark Nelson, our Chief Operating Officer.

Before we begin, I'd like to remind you all 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 you have all had a chance to see our earnings, which were released yesterday just prior to our annual meeting and which are available on our website. Today we will provide additional clarity and details to the information that we've 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 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 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 yesterday, we reported positive earnings for the first quarter 2009 even with a rapidly deteriorating economy here in the Northwest and an increased addition to our provision for loan losses. Gary will review the results in more detail a bit later.

I'd like to stress right up front that we believe that we are in a very strong position and have the right strategies in place to continue to manage through this business cycle. Although the recession may last longer than we had originally hoped or expected a few months ago, our underlying banking fundamentals remain sound and our core operations continue to be profitable.

We're well capitalized at 14.47% for the end of the first quarter, and this includes about $77 million in capital we raised through the U.S. Treasury's voluntary capital purchase program which was completed on November 21st last year. Columbia paid $1.1 million in preferred stock dividends to the Treasury during the first quarter and $470,000 in the fourth quarter last year.

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 that has helped to mitigate risk with over 37% in business loans and with our percentage of construction loans trending downward. Our core deposits are an important reason we've maintained a relatively stable net interest margin. They are about 80% of our total deposits and result from the strong relationships we have built with our customers. We have also focused on delivering the financial services our customers want, when and where they want them, and with the highest level of service possible.

We measure the level of customer service on a monthly basis. We have maintained or increased our share of deposits in most of the markets we serve, and we are successfully managing our expenses and improving our efficiencies without compromising customer service, and without weakening our competitive position for when the economy rebounds.

At this point I'd like to take just a few minutes to discuss with you what we currently see in the economy in our markets. While the Pacific Northwest has its diversified economy with commercial aviation, biotech, software, and export industries both Washington and Oregon have rapidly joined this steep economic downturn.

As I mentioned earlier, we're certainly concerned about the duration of this recession and its effect on our ability to grow, particularly in 2009. We've seen significant and ongoing workforce reductions by companies such as Boeing, Microsoft, Starbucks, Russell Investments and many others of all sizes. The Port of Tacoma announced Tuesday that they are planning on an undetermined number of layoffs some time during the second quarter. A little over a week ago, Boeing announced it will cut production at its Everett wide body jet assembly plant, which will result in job cuts in the middle of next year and probably mean layoffs at Boeing suppliers this year.

Last week, Russell Investments laid off a number of their employees here in Tacoma as a result of their previously announced 20% cut of its worldwide workforce; and of course Starbucks announced it's cutting almost 7,000 jobs and closing 300 more stores worldwide. Other challenges include slowing exports and the loss of Washington Mutual and Safe Co and the resulting job losses from those two companies. Housing foreclosures continued 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. With the exception of Nebraska, every state in the union has seen rising unemployment rates. Washington state's unemployment rate was 4.6% in December 2007 and 7.1% for December 2008; and just a few months later, the March 2009 unemployment rate jumped to 9.2%, higher than the national rate of 8.5% and the highest in over 20 years for the state.

Oregon's unemployment rate has been increasing in average of one percentage point per month for the last five months. In March, Oregon's rate was the highest it's been in 26 years increasing to 12.1%, up from 10.8% in February and from 9.8% in January; and is close to four percentage points higher than the national unemployment rate of 8.5%. For the last two months, Oregon has had the second highest unemployment rate in the country behind only Michigan. As you'd expect, construction jobs have been the hardest hit for job losses in both states, in addition to manufacturing and the trade transportation and utility sectors.

The picture was a bit better in the greater Seattle/King County area. While unemployment rose, King County's rate is at 8%, the lowest in western Washington. It's interesting that despite a flagging economy, Seattle is the nation's sixth most popular destination for people moving from outside the state; and Portland, Oregon is the fifth most popular destination. People moving into the area most likely help to increase the unemployment rates during a tough economy, but they are bright spots in both states' economy.

The military, as always, is a major driver of Pierce County's economy and of our region as whole. The military accounts for more than 43,000 jobs in Pierce County alone and nearly 125,000 jobs and $3 billion in payroll to our region. Last year, Congress earmarked more than $385 million for new construction at Fort Lewis right 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 2.4%; 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.

Bank of Astoria's six branches are located on the north coast of Oregon where the picture isn't quite so bleak though they are seeing the affects of the national recession. Classup County's unemployment rate was 10.1% in March, but it was still one of the lowest in the state and well below the statewide average of 12.1%.

Despite all this gloomy economic news, I feel very confident that our well diversified area of the country will weather this storm. In fact, there were some encouraging signs in home sales in King and Snohomish Counties last month. Although one month does not create a trend, it's important for us to also report the positive information. And as I never tire of mentioning, I'm confident that our company will navigate through this very difficult economy as well.

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

Thanks, Melanie.

Yesterday, we announced net income applicable to common shareholders of $419,000 for the first quarter of 2009 or $0.02 per diluted share; compared to net income of $11 million or $0.61 per diluted share for the same quarter last year. The primary driver for these results, was an $11 million provision for loan losses we made during the quarter due to the continued deterioration of our area's economy and the resulting impact on our real estate related construction loan portfolio.

As Melanie mentioned earlier, we paid $1.1 million in preferred stock dividend, compared to $470,000 in the fourth quarter last year due to our participation in the U.S. Treasury's capital purchase program. We understand that many banks are considering returning the capital they received. We are continuing to evaluate the program and consider the many reasons both for and against taking this action.

Columbia's facing the same economic pressures and challenges as the rest of the banking industry; and as Melanie mentioned, our market area's economy is 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 total risk-based capital ratio increased to 14.47%, up from 14.25% at December 31, 2008. Our capital ratios are well in excess of the regulatory definition of well capitalized of 10%. During the fourth quarter last year, we also filed a Form S-3 shelf registration statement, which will increase our capital flexibility and access to capital if necessary; and put us in a position to take advantage of potential opportunities that may arise over the next several years.

Our Board of Directors declared a $0.01 dividend for the first quarter. The Board reviewed our dividend in light of our current market valuation, dividend yield, pay out ratio, and our desire to retain capital and decided to lower the dividend from $0.04 paid in the last quarter. This dividend decision is difficult but prudent as we deal with this uncertain economic cycle. We hope to return to higher dividend levels as more normalized market conditions resume, subject of course to regulatory restrictions. We believe this action is in the best long term interest of our shareholders.

Our liquidity ratio is a measure to track the funds available to meet the needs of our customers and for the general operations of the Company. We are pleased with our liquidity ratio of about 35% or well over $1 billion, up from 34% at the end of the fourth quarter 2008. Our liquidity comes from the banks investment and loan portfolios, which are utilized to secure our borrowing lines at the FHLBS Seattle and the Federal Reserve Bank. We also have other sources of liquidity such as repurchase agreements and wholesale funding sources, which we can use as needed to assist in managing our balance sheet.

As you know, there were deep interest rate cuts of 175 basis points during the fourth quarter of 2008, which did impact our net interest margin. Our tax equivalent net interest margin for the first quarter decreased to 4.26% as compared to 4.38% one year ago, but is still relatively stable. This decrease in net interest margin was affected since over 40% of our loans are tied to the prime rate or other short-term indices. So as rates have declined tremendously.

During the first quarter we had interest reversals related to non-accrual loans of $625,000 which negatively impacted our net interest margin as well. Excluding this impact of interest reversals, our net interest margin for the quarter would have been 4.35%. Average interest earning asset yields have decreased to 5.45% or 144 basis points from 6.89% for the same quarter in 2008. Average interest bearing liability costs have decreased 157 basis points to 1.54% from 3.11% a year ago.

We have been successful in decreasing the cost of interest bearing deposits by 42 basis points this quarter. We expect the pressure on our earnings to continue as we manage through the problem loans, the impact of the Fed's December rate cuts that's fully felt as the loan's portfolio reprices, and the competition for low cost deposits continues.

Non-performing assets ended the quarter at 3.99% of total assets as compared to 3.54% at year-end 2008. Non-performing assets at March 31, 2009, were $121.7 million and net charge-offs were $9.5 million compared to $761,000 for the same period in 2008. The provision for loan losses was $11 million for the first quarter of 2009 versus $2.1 million for the same period last year. Looking ahead, the lack of stability in the economy makes us likely to see similar additions to the provision as we experienced this quarter.

Our loans ended the quarter at $2.2 billion, down slightly from year-end 2008. Our commercial business loan totals are $812.6 million, up from $810.9 million at December 31, 2008. Commercial real estate loan totals are down roughly $3.5 million from year-end while the consumer portion of the portfolio is down $5 million or 2%. Our commercial construction loans have declined by $17 million and residential construction has decreased $23 million, all compared to December 2008.

Core deposits declined from $1.94 billion at the end of 2008 to $1.87 billion at March 31, 2009. The decline is centered mainly in CDs less than $100,000 and interest bearing demand and money-market accounts. The decline in CDs is due to the maturity of short-term promotional specials offered during the second and third quarters of 2008 coupled with our election to focus on lower cost funding alternatives rather than growth within this portion of our deposit base. We attribute the decline in interest bearing demand to depositors moving funds to government backed sweep accounts, SEDARs and paying down their borrowings.

Our efficiency ratio was 63.59% for the first quarter of 2009 compared to 62.36% for the first quarter 2008. While we were successful in managing our expenses, the efficiency ratio increased due to lower net interest income as a result of the interest rate reductions in the fourth quarter of 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 was $7 million, down from $10 million in the first quarter of last year. The decrease is primarily due to a one-time redemption of Visa and MasterCard shares, as well as a net gain on the sale of investment securities the first quarter of last year in the amount of $2 million and $882,000 respectively. After removing these one-time non-recurring items, non-interest income declined 4% mostly due to a reduction in merchant services fees and other non-interest income.

We recorded a tax benefit of $816,000 for the first quarter. 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 26% to 28%; 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 years because we don't 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.

As previously discussed, the economy in the markets we serve continue to decline during the first quarter of this year. The affect can be seen in our loan portfolio and the associated credit metrics such as non-performing assets which increased $12 million during the quarter to $121.6 million as of March 31, 2009. Residential construction loans and related OREO properties continue to make up most of our non-performing assets and totaled about $70 million or 58% of our non-performing assets.

During the first quarter, we modestly reduced our non-performing assets in the residential construction segment by $2.2 million. The churn in the portfolio can be broken down into about $4.3 million in payments, $1.7 million transferred to OREO, about $745,000 returned to accrual status, and net charge-offs of $6.3 million. Approximately $3 million of these charge-offs were related to credits where we had previously written down the loan amount; however, as residential real estate values continue to decline during the period, we took appropriate additional charge-offs on those assets where there was more current market information available.

I would like to highlight that we are continuously evaluating our non-performing assets to make sure we are appropriately marking them to the most current valuation available. While housing prices appear to be stabilizing nationally, this trend is not yet apparent in the Pacific Northwest. While we have seen an uptick in sales activity and inventory levels are declining, values have not yet begun to reflect these positive market dynamics.

As Gary mentioned, net loan charge-offs were about $9.5 million for the first quarter compared to $6.3 million for the fourth quarter of 2008. Other than our residential construction segment, charge-offs were centered in our commercial business portfolio and are primarily related to one credit with a net charge-off of about $2.3 million. This credit is housing related since the loan is secured by an assignment of a deed of trust on a housing related development.

At the end of the first quarter, we extended about $12 million in commitments to finance companies which have in turn financed residential related development. Of this $12 million, about $7.4 million is related to the credit in which we took the $2.3 million net charge-off.

So as we had expected, the issues affecting the for sale housing industry and the overall decline in the economy are beginning to be felt in our commercial business segment. I would point out, however, that absent this one credit, the metrics for this portfolio, non-accruals and past dues were about even with those exhibited at year-end. So we continue to be pleased with how the portfolio is performing in light of the current economic challenges previously discussed.

I attribute most of this to our team of excellent bankers. They have done an excellent job keeping in touch with their clients and this has allowed us to remain proactive in addressing issues and coming up with appropriate action plans as needed. This approach not only reduces credit losses; but just as importantly, helps us submit our relationships with our customers.

The term commercial real estate portfolio also continues to perform within our expectations, and non-performing assets in this category remain relatively even with the prior quarter. However, we have begun to see some stress in this portfolio primarily centered in housing supply chain properties and retail related properties as would be expected. While this has not resulted in any marked increase in delinquencies or non-performing assets, we nevertheless continue to monitor this portfolio closely. In fact, we just recently completed a review of our retail related exposures to ensure we had accurate risk ratings for this portfolio.

Consistent with our strategy to reduce the bank's exposure to construction related assets, we continue to make progress in reducing our exposure to the for sale housing segment. We were able to reduce our loan totals in the one to four family residential construction segment by $23.4 million while also reducing our unfunded commitments by an additional $5.6 million.

Within the commercial construction segment, we were able to reduce loan totals by $16.5 million and unfunded commitments by $2.5 million. A large portion of this reduction was in our income property construction segment which now accounts for about $31.7 million of the total $64.7 million in commercial construction loans. Again, our condominium exposure is in this segment and it accounts for about $23.4 million. So for the quarter, we had a modest reduction in condominium exposure of $1.8 million. Approximately $14.9 million of our condominium exposure was on non-accrual as of March 31, 2009.

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: 26% is located in Pierce County, Washington that is; and 40% is located in King County, Washington; and 5% is located in Snohomish County, Washington. In total, we have about 78% of our for sale housing portfolio in Washington state as of March 31, 2009.

The Pierce County market can be further segregated into acquisition and development loans which make up about 24% of our exposure in that county, while vertical construction loans account for about 32%, lot loans at 32% and land at 12%. As of March 31, 2009, approximately 49% of this market was on non-accrual.

King County can be divided into acquisition development at around 21%, vertical construction at 47%, lots at 21%, and land at 11%. King County continues to perform better than Pierce County; however. we have placed about 19% 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; and this market can be segregated into acquisition and development at 17%, vertical construction at 28%, lots at 28%, and land at roughly 27%. We have placed approximately 4% of this market on non-accrual as of March 31, 2009.

Another 22% of our for sale housing portfolio is in Oregon; primarily in the three county area of Klakamus, Washington and Multinoma Counties. Collectively this makes up 10% of the entire one to four family construction loan portfolio. This market can be segregated into acquisition development at 50%, vertical construction at 31%, lots at 13% and land at roughly 6%. We have placed approximately 61% of this market on non-accrual.

Finally, past due loans were $20.6 million or 0.95% of total loans as of March 31, 2009. This compares to $10.4 million or 0.4%--0.46% of total loans at December 31, 2008. The increase in past due loans over the prior quarter was centered in our commercial real estate portfolio, where we had some loans totaling $4.7 million or roughly 0.21% of total loans in which loan documentation could not be executed by quarter end. Documentation has been extended in the normal course of business. These loans are no longer past due and are continuing to perform. Excluding these loans, the bank's past due loans at the end of March would have only been 0.74%.

Okay, with that, I would now like to turn the call over to Mark Nelson, our Chief Operating Officer.

Thank you, Andy.

Last quarter, we continued our efforts to improve our efficiency by consolidating three of our branch offices including Sunny Brook in Portland, Forest Villa near Auburn, and our Martin Luther King Jr. branch in Tacoma. These consolidations made 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 committment to customer service in each of these markets. We took great care to ensure we received customer feedback in communication about the process and that consolidations were well accepted by the communities. The only location scheduled to open in 2009 is our new branch in Renton, Washington.

Our lending strategy has remained focused on core C&I relationships. The $32 million growth in commercial loans since the end of first quarter 2008 consisted principally of business term loans and lines, growth in our professional lending specialty, and small business loans through our retail system. We have the capital liquidity and the product and service tools to focus on some lending activities that will deploy some of our CPP dollars.

First, while several major small business administration or SBA lenders have exited the market or have sharply reduced their lending activities, we are expanding our focus in the area of small business lending. Last week, we began a marketing campaign designed to get this message to small business.

In addition, we have launched a program to help stimulate the local housing market by offering special financing on single family residences which we have financed for many of our builder clients. The list of available homes and lots as well as the financing terms are available to customers on our Columbia Bank website. Three products are being offered, including a conforming 30-year fixed rate, a jumbo 30- year fixed rate, and lot purchase loans for individuals.

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

Thanks Mark.

To sum up on our comments this afternoon, we believe Columbia is in a good position to ride out these challenging times and that there are plenty of opportunities available. 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 and retain a healthy core deposit base because of our reputation for delivering excellent customer service.

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 banking arena here in the Northwest. We want to ensure we have a strong base from which to operate when the economy begins to rebound. We'll continue to be disciplined in our expense control and to take actions that will improve our efficiencies without sacrificing customer service. Our efforts and decisions will be made with the long term benefit of the Company in mind, relying on the core values that have been the foundation of our success.

These are certainly unusual times. I believe, however, that we are very well positioned to become even stronger when we get through this economic cycle and will have the momentum to grow into a true Pacific Northwest regional banking franchise.

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

And now, operator, if you will open the call for questions?

Thank you. (Operator Instructions). Your first question comes from the line of Aaron Deer with Sandler O'Neill.

Hi, Aaron.

Hi, good afternoon, everyone.

A couple questions. First of all, Andy, I was hoping maybe you could give some color to the extent that you are seeing some stress in your commercial real estate, is it in particular types or geographies where you're seeing more of that at this point?

Well, certainly, the asset class that is exhibiting the most weakness is retail properties; and then I would say that that's pretty well evenly distributed across the footprint. I wouldn't necessarily say that Seattle retail is doing any better than Portland or Astoria. That seems to be something that's a little bit more broad based.

The housing supply chain properties here in Pierce County, they haven't seemed to be impacted as much and I think that's partly due to some of the military spending that Melanie talked about--and during her portion of the cal. But in the outlying areas especially Snohomish County and then King County, we've seen a little bit more of an impact from a geography standpoint in terms of those portfolios.

Can you give us a sense of the size of some of those more, I guess for lack of better term "at risk" portfolios like the retail and housing supply chain connected CRE?

Yes.

The retail portfolio is about $106 million and that's split between about $22 million of owner occupied properties and then $84 million of income property; and then the housing supply chain, I don't have those numbers at my finger tips, but it was approximately about, I want to say about $80 million to $90 million and I don't remember what the mix was between owner occupied and income property.

Okay.

And then Mark had mentioned expanding the SBA business. I'm wondering what are the thoughts in terms of keeping that product on balance sheet versus trying to sell into the secondary market; and if the latter, what kind of market are you seeing there at this point?

Aaron, the market for selling the interest in SBA loans has really been pretty dry the last four or five months. We're seeing premiums start to generate again, and I think that's based on the interest in SBA lending, some of the lowering of the restrictions there, higher guarantee amounts, lowering of fees. We've always had a very strong program. Clearly, those are good earning assets. We're prepared to hang on to those on the balance sheet, but if there are some premiums to be had out there, there's an opportunity to generate non-interest income and that's also a fundamental part of our business strategy with that line of business.

Okay, thanks, I'll step back.

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

Hi, Joe.

Hi, good afternoon, everyone.

Joe.

I guess one quick follow-up on Aaron's question. Just on the retail side of things. Just kind of curious if you give us a little better sense of the type of property that Columbia is underwriting against and also curious just the types of stress that you've been seeing recently?

Sure.

We do finance a lot of single tenant retail. So it might be, for example, a muffler supply chain that has four or five stores distributed throughout our region. And in that case, we're looking through to the owner occupied business in terms of how we underwrite that. We also do a lot of small strip retail anywhere from three to six or seven bay kind of retail and those are generally the ones that you see that have the teriyaki, the nail salon, the Curves outlet, all that kind of stuff. Those, again, we tend to underwrite based on cash flow and we tend to look at a coverage ratio of 130 to 135 in terms of how we go into the properties.

Okay and are you seeing vacancies tic up quite a bit then? Is that where the pressure is?

In some cases, it's been vacancies and so a bay may go dark on them so they have to retenant it; and then in just talking with our customers, they're telling us their tenants are coming to them saying we need to talk about possibly reducing the rents that you're currently charging. So while we haven't seen those necessary flow through the financial statements, we do expect that there will have to be some rent concessions in some of these properties to keep people in the buildings.

All right, okay.

Thanks, and then I guess the other question was just in general what's kind of your expectation for loan balances going forward here? Should we expect to see continued run-off and if so, kind of at this pace we saw this quarter or what?

This is Mark, I'll answer that.

I think we would expect to see some run-off, mostly from the pay-offs and reductions in our problem loan portfolios. We're pretty aggressive out there talking with prospects, I think the disruptions in the banking markets are certainly creating opportunities but at the same time we're also being very diligent in our underwriting of the new C&I credits that we're putting on. So at best I would say we had ended the year somewhere close to where we're at today or down a little bit due to those pay-offs.

Okay. Great. Thanks so much.

Thanks, Joe.

Your next question comes from the line of Matthew Clark with KBW.

Hey, good afternoon.

Hi, Matt.

How you doing?

Andy, could you help me out with just the for sale construction bucket in terms of dollars, the 186 and just break it down in terms of dollars? I always have trouble with you breaking out the counties, but the single family residential vertical, single family residential lots, land A& D and then land by itself.

Right. We've got about 75 million in vertical.

Okay.

46.9 in lots, 41.5 in A& D, and 22.7 in land.

Okay, and can you give me the related non-accruals for those four buckets?

Yes. Of the vertical 24.5, lots are 16.5, give or take, A& D is at 19, and then 6.8 to 7 million of the land is non-accrual.

Okay.

And then in terms of the pay offs you saw in the construction book, I guess we can include commercial construction too in this case; but can you just talk about ways that you were able to get pay-offs? Is there anything? I know that you guys have used some unique strategies in the past and whether or not you've been able to have continued success there or not and whether or not you see additional opportunities to do so, get those balances down?

Yes.

In fact, we've already got, we had about 4 million, for example, in OREO at the end of the quarter and we've got 3 million of that already under contract for sale, so we've done a fairly good job of churning that OREO. We also did a note sale this past quarter on a A&D lot development project that we had up in Snohomish County where we felt that was the best way to resolve that situation. That is the first note sale that we've done, and--

Can you talk about--mention what the severity was on that sale?

Well, our balance at the end of December was a little over, we charged off about, I'm trying to think--we charged off about 1.2 on that from the end of December and we captured about three.

Okay.

So that was obviously a large portion of our payments in the quarter. Traditionally the first quarter of the Northwest is kind of slow and so a lot of the rest--especially the vertical stuff started happening in the latter part of the quarter during March. We have seen a pick up in completed homes. So we are working with a lot of our customers and you'll see in some of our numbers an uptick in our TDRs. Those are still non-accrual assets, but they are troubled debt restructures where we're working with them to finish homes and also put new homes on lots where we think that the flats have momentum.

And you know where those stood at the end of the quarter, TDRs?

It was about 8 million I believe.

And they were zero at year-end?

Yes, eight million, all 48.

And were they zero at year-end?

In terms of single family residential development they were zero at year-end.

Okay.

We had one commercial TDR at year-end.

For 587,000.

Correct.

So I think you're going to see the TDR bucket grow as we continue to work with some of these folks.

Okay, great. Thank you.

Your next question comes from the line of Jonathan Elmi with Fox-Pitt Kelton.

Hi, good afternoon, guys.

Hi Jonathan.

Thanks for taking my question.

Actually a lot of what I had has been answered already. But I guess one question just looking at the net interest margin, saw it came down a little bit again this quarter. Do you guys have a sense for whether you think that it's going to be relatively stable going forward, or if maybe you talk about the order of magnitude of decline that you can see going forward?

Jonathan, I think that the net interest margin is still relatively stable when we take out the impact of the interest reversals.

Sure.

So as we go forward, we always consider that we would have some pressure on our margin given the competition for deposits in our market. So I guess we would stick with that at this point but we work very hard to adjust the pricing on our core deposit base and as well as our loan pricing to maintain that margin, and we're still working very hard for that.

Okay, great. Thanks very much. That's it.

You bet.

Thank you.

(Operator Instructions). Your next question comes from the line of Jeff Rulis with D.A. Davidson.

Hi, Jeff.

Hi. Good afternoon.

Just a couple line item details. The other non-interest income line item was up sequentially or excuse me, down sequentially about $250,000 and then comp expense was up sequentially quite a bit. Is there some seasonality in both those line items?

Yes.

First of all, in the other non-interest income, that's typically some fees from our stand by letters of credit and so on of our international department, which has seen a decrease in activity over the last quarter. That line item would also include swap income from loans that we make, which also has experienced a decrease.

Now as far as the salary line, there is some seasonality in that as we adjust some of those accruals that we have for bonus and so on at the end of December, and we also adjust somewhat at the end of each quarter but more so at the end of the year. So you're right. There is some seasonality in there.

Just quickly back to the other non-interest income then. So those factors continue around that million dollar level is a good estimate for non-interest income?

I'm sorry, repeat the question.

The factors that impacted the other non-interest income, is that a continual process that you see going forward?

Yes.

I think in the other non-interest income section, as Mark talked about that we would have somewhat lower volumes, would certainly impact that swap income; and absent increased activity--absent increased activity, we would also see a decline in the international and possibly our investment services income.

Okay.

And then Andy, you mentioned that residential values really haven't stabilized and I guess in the press release you even mentioned a pretty steep drop in January. How was that process through the end of the quarter and even into April? Is that you sensing that those values have even indicated any sort of stabilizing or is it just sharp drops through even into Q2?

The data would indicate that through March and I haven't seen anything for April, that the values have continued to decline. In the low end or the most affordable segment, that's the segment that seems to be showing some signs of stabilizing, at least in our market. But certainly the mid-tier homes say $250,000 to $300,000 to $600,000 to $750,000, that tier continues to see declines as well as homes $750,000 and a $1 million and a above.

So the market that seems to be doing the best right now is the starter homes and I think that's being helped certainly by the stimulus of the tax credit and very low mortgage rates along with the FHA program that can get you in at 97%. So those buyers, people coming in the first time buyers, for example, it's actually a great time for them to be purchasing a home, but you're not seeing the typical, I sold my home to move up into a bigger home. That trend is not really started to kick in yet.

And this maybe a little tough to quantify, but your builders exposure, do you think it's more on the starter side or the high end product?

We don't have a lot of high end exposure. It's not something that we did a lot of. So most of our exposure is evenly split between the low end and the mid tier and partly that's driven by King County where average home prices are considerably higher than what they are in Snohomish and Pierce County.

Okay, thank you.

Jeff?

Yes.

Before you leave, just to follow-up on talking about our core compensation expense. One of the other items in that is our deferred labor cost and that has been less of a deferral in the first quarter due to the lower volume of loans that we generate, but if we do a true-up, which we adjust for the deferred labor costs and so on, our first quarter compensation expense was about $12.9 million compared to $14.1 million for the first quarter of last year, just as a basis of comparison.

Okay, appreciate it. Thank you, Gary.

You bet.

There are no further questions at this time.

Okay.

Well, thank you, everyone. We appreciate you joining us this afternoon. We'll talk to you next quarter.

This concludes today's Columbia Banking System's first quarter 2009 earnings conference call. You may now disconnect.