Columbia Banking System Inc (COLB) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's fourth quarter and year 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 Systems.

Thank you, Eliza and good afternoon, everyone, and welcome to Columbia's fourth quarter and year-end conference call. Joining me on the call today are Gary Schminkey, our Chief Financial Officer, and Andy McDonald, our Chief Credit Officer. Mark Nelson, our Chief Operating Officer, will also be available for questions following our formal presentation.

Of course, I need to remind you that we will be making some forward-looking statements today, which are subject to economic and other factors. And for a full discussion of risks and uncertainties associated with the forward-looking statements please refer to our securities filings and in particular form 10-K filed with the SEC for the year 2008.

I assume you've all had a chance to see our results, which were released this morning and are available on our website. We'll be providing additional clarity and details to that information. Gary will be providing a brief summary of our results for the quarter, including our equity position, liquidity ratio, and net interest margin. Andy McDonald will review our credit quality information, including our allowance for loan losses, charges, and our loan mix. I'll conclude by discussing our strategy for the rest of 2010 and beyond. We'll also review our FDIC assisted acquisition of Columbia River Bank, which took place on January 22nd. We will then open the discussion to questions.

In our press release this morning, we reported net income for the fourth quarter 2009 of $447,000 or $0.02 per common share and a net loss for the year of $8.4 million or $0.38 per common share. Our results reflect the elevated level of our provision for loan losses, which continues to be the result of the decline in real estate values, particularly in the residential land lots and lot development areas.

Gary and Andy will go into more depth about the quarter's result a bit later. Due to the continuing and difficult economy, we've certainly devoted extra attention to our credit issues and will continue to do so. However, our fundamental strength has confirmed the merit of our business model and has allowed us to remain externally focused on our current and potential customers and in opportunities in our markets. We were very pleased to have the successful bid for the deposits and loans of Columbia River Bank. The acquisition places us in an even stronger strategic position as the economy improves.

We continue to be very well capitalized. At the end of 2009, we had a total risk based capital ratio of 19.6%, and as you know, we raised $120 million in capital through a successful public common stock offering last August, one of the few community banks able to do so. In addition to our capital, we have ample sources of available liquidity with a ratio of 51%, translating into about $1.6 billion to meet the loan and deposit needs of our customers.

Our net interest margin continues to be stable and was 4.34% for the quarter. Our exceptional level of core deposits is an important reason we have maintained that relatively stable net interest margin. They are over 83% of our total deposits and reflect the strong relationships we continue to build with our customers.

With our reputation as a great place to work, we have attracted talented bankers who are helping us increase our share of the market in the communities we serve. With our recent growth, particularly in Oregon, great people have become even more important. Speaking of growth in Oregon, I'd like to talk a little about our acquisition of Columbia River Bank. It's certainly been a busy time and as we work hard to ensure a smooth transition for the customers and employees, and their focus as a local bank has always been on the communities they serve and that certainly fits well into our philosophy. The integration process seems to be going well and we help -- and to help ensure a smooth transition for employees and customers, we still have Columbia Bank investors in every branch.

As we mentioned in our conference call last Monday, we acquired about $1 billion in assets and about $980 million in deposits, which includes about $786 million in core deposits. Our agreement with the FDIC included credit loss protection covering about $700 million in loans and real estate assets. The FDIC assumes 80% of approximately the first $206 million in losses and 95% of the losses above that level.

We are also estimating considerable cost savings of about 25% to 30%. We estimate we will receive $40 million in cash from the FDIC. The acquisition has expanded our geographic footprint in both of the states in which we do business with 14 new branches in Oregon and seven in Washington. This brings Columbia Bank to 73 branches in two states and significantly increases our market share in Oregon. Their locations cover the Columbia Gorge region, Central Oregon, the Willamette Valley, and the Columbia Basin in Washington.

Their core deposits, which were about 78% of their total deposits will provide us with additional liquidity. Our net interest margin stands to benefit as we begin to reprice higher cost funds. As we've long stated, criteria we consider in an acquisition includes that first of all it must make financial sense. Secondly, it needs to extend our geographic footprint, and third, it needs to be culturally a good fit. And as you can see, this transaction met all three of those criteria.

I'd like to give you a brief update on what we are currently seeing here in the Pacific Northwest in the markets we serve. It looks like the recession is technically over and we are seeing local leading economic indicators pointing upward. However, we believe the recovery will be slow and the economic pressures in Washington and Oregon will continue to be challenging for some time. The employment market here in the Pacific Northwest is a major concern. As job growth has lagged behind other signs of recovery, the worry of course is that the rebound in the economy could falter if consumer spending, which accounts for about 70% of total economic activity, weakens in the coming months due to continued high levels of unemployment or further economic uncertainties.

Washington's state jobless rate rose to 9.5% last month from 9% in November and from 6.5% at the end of 2008. However, considerably fewer jobs were lost the last six months of 2009 compared to the first six months. Washington's head of the employment security department said that while it's typical for jobs to be the last thing to return coming out of a recession, overall job losses are fairly trending downward and that's a positive sign. Arun Raha, Washington State's economist said that the good news is, is that Washington is still in better shape than the national economy. Our highest wage sectors, aerospace and software publishing, are relatively stable and that's helped.

Michael Parks of Marple's Northwest Business Letter agrees, saying Washington should come out better this year than the nation or other states in the region because we benefit from a large and diverse tech sector, less of a housing bubble, an expert driven economy, and hydropower. In addition, Asian economies are getting healthier, which is good news for export-focused states such as Washington. The Port of Tacoma still expresses confidence in an upward trend for the longer-term with Transpacific Trade, particularly China, predicted to increase up to 60% in the next six or seven years.

The military presence here in Western Washington is stable and is an important part of the regional economy, accounting for about $3 billion in payroll and roughly 125,000 job sin the Puget Sound region, more than 40,000 jobs right here in Pierce County alone. Other industries haven't been so fortunate. Weak consumer spending continues to hurt the retail sector and the inventory of homes remains high, particularly in the higher priced homes. Vacancy rates continue to rise in the commercial real estate market, which will likely reduce the number of jobs in the construction sector.

New construction close sales in Pierce County saw a little change from November 2009, but showed a 42% increase from December a year ago. Prices for new construction dropped 3% from November to December then were down 20% from December 2008. Resales for the county were down 4% month-over-month, but jumped 56% from December 2008 while resale prices declined 3% month-over-month and were down 10% from year ago.

The Seattle-King County area has fared somewhat better than the rest of the state in the past. King County's unemployment ticked up to 8.5% in December. New construction sales for King County increased 41% from December 2008 and 8% month-over-month. Prices for new construction were up 8% from November, but were down 12% from December 2008. Re-sales declined 10% from November 2009, but jumped 61% from December 2008 and re-sale prices increased 3% from November, but had a 6% decline from a year ago.

Oregon's economy has continued to improve according to the University of Oregon's Index of Economic Indicators. The index has risen for four consecutive months despite a challenging labor market. Manufacturing seems to have hit bottom in October and has shown two months of job [gates]. Trade, transportation, and utilities added jobs in December. Residential building permits rose sharply to the highest level since May 2009, however commercial bankruptcies climbed 74% in Oregon last year compared to 38% for the US as a whole.

Oregon's unemployment rate rose slightly in December to 11% from 10.7% in November, still one of the highest in the country. Even so, 2,900 jobs were added in December after a loss of 2,000 jobs in November. The poor economy has created job opportunities in education and health services, social services, job training, and counseling.

In summary, we're beginning to see some signs of improvement from the economy in both Washington and Oregon, although recovery will probably be slow. We do have a diverse economy, including aerospace, the well-entrenched high tech industry, and internal exports, which should help us recover more quickly than other areas of the country that lack economic diversity of the Pacific Northwest.

With that, I will now turn the call over to Gary.

Thank you, Melanie. Before I begin, I would like to add my welcome to the customers and employees of Columbia River Bank who might be listening. I'm looking forward to working with such talented and dedicated group of people. Again, welcome to Columbia Bank.

This morning we announced net income applicable to common shareholders of $447,000 for the fourth quarter of 2009 or $0.02 per diluted common share, compared to a net income of $1.3 million or $0.07 per diluted common share for the same quarter last year. The primary driver for these results was a $15 million provision for loan losses expense incurred during the quarter. As Melanie mentioned, the provision expense was driven by the decline in real estate values along with the lingering softness in our regional economy.

Now I'd like to review a few of the important points about Columbia's fundamentals. Our total risk-based capital ratio at December 31st was 19.6%, up from 19.06% at September 30th, 2009 and 14.25% at December 31st, 2008. Our capital ratios are well in excess of the regulatory definition of well capitalized of 10%. Our excess capital over and above the 10% minimum to be well capitalized was roughly $224 million at the end of 2009. Even after adding over $1 billion in assets from Columbia River Bank, our total risk based capital ratio is well over 17%.

We also measure our tangible common equity to tangible assets. At the end of the fourth quarter, this ratio stood at 11.4% as compared to 8% at December 31st, 2008, and 11.5% for the third quarter of 2009. 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 very pleased to have a liquidity ratio of about 51% or well over $1.6 billion, up from 34% at the end of the fourth quarter of last year.

The ratio improved over the year due to a lower asset base, decreased borrowing, and the expansion of our borrowing capacity at the Federal Reserve. Much of our liquidity comes from the bank's investment and loan portfolios, which are utilized to secure our borrowing lines at the FHLB of Seattle and at 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.

Our tax equivalent net interest margin for the fourth quarter was 4.3%, down from 4.39% one year ago and 4.34% for the third quarter of 2009. During the fourth quarter, interest reversals related to non-accrual loans were $194,569, which negatively impacted our net interest margin by approximately two basis points in the fourth quarter. Average interest-earning asset yields have decreased to 5.12%, or 80 basis points, from 5.92% for the same quarter in 2008. During the same period, average interest-bearing liability costs have decreased 77 basis points to 1.16%.

For the full year, we have been successful in decreasing the cost of interest-bearing deposits by 110 basis points, while the yield on interest earning assets have declined by 101 basis points. Non-performing assets ended the year at 4.05% of total assets as compared to 3.54% at year end 2008 and down from 4.7% at the end of the third quarter. Non-performing assets at December 31st, 2009 were $129.5 million and net charge-offs were $13.2 million for the fourth quarter compared to net charge-offs of $6.3 million for the same period in 2008.

The provision for loan losses was $15 million for the fourth quarter 2009 versus $13.3 million for the same period last year. Looking ahead, the volatility in the economy makes it likely that we will experience elevated provisions for the foreseeable future. Our loans ended the quarter at $2 billion, down $223 million from year-end 2008. Our commercial business loan totals are $744 million, down from $811 million at December 31st, 2008. The decline in commercial business loans is primarily a result of loan pay-downs and decreased line of credit usage.

Commercial real estate loan totals are up slightly from year-end 2008 at $856 million, while consumer loans are down about $15 million or 7%. Our commercial construction loans have declined by $39 million or 48% and residential construction has decreased $102 million or 49%, all compared to last year at this time.

A real success story is core deposits. Core deposits rose about 7% from $1.94 billion at the end of 2008 to $2.07 billion at December 31st, 2009. If we exclude CDs, less than $100,000, core deposits increased by $181 million or about 11%, mostly centered in our non-interest-bearing demand and money market accounts. The decline in CDs is due to our election to focus on lower costs, non-maturity deposit funding alternatives rather than growth within this portion of our deposit base. Somewhat offsetting the growth in core deposits was a decline in interest-bearing demand accounts, which decreased about 4% or $19 million during the year. We attribute the decline in interest-bearing demand deposits to depositors moving funds to government-backed sweep accounts and paying down their borrowings.

Our efficiency ratio was 58.12% for the fourth quarter of 2009 compared to 57.62% for the fourth quarter of last year. While we were successful at managing our expenses, the efficiency ratio increased due to increased expenses associated with managing our problem assets and increased regulatory premiums. 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 we work our way through problem credits. The net cost of operation of OREO was $271,000 for the fourth quarter compared to a $30,000 gain for the same period last year. For the 12 months ended December 31st, 2009, the net cost of operation of OREO was $861,000 compared to a gain of $49,000 for the same period in 2008.

Compensation and benefit costs for the fourth quarter were down $149,000 or about 1% from a year earlier. Our new retail location and the investment and banking teams have had some impact on our expense ratios over the next [day] or so as these teams build up their portfolios. But over the long-term, we expect they will have a very favorable effect on the Company's performance metrics. Going forward, we will expect that expenses related to the transition of Columbia River Bank in to Columbia Bank will be about $2.5 million and will certainly impact the first and second quarters of this year. We will also have increased expenses to manage the portfolio of problem assets we acquired. Overall, we expect the addition of Columbia River Bank to be profitable in 2010.

Non-interest income was $8.5 million compared to $6.3 million a year earlier. The increase was primarily due to a $1 million expense in the fourth quarter last year related to the other-than-temporary impairment charge for the decline in fair value of our investment and preferred stock issued by Freddie Mac and Fannie Mae. Excluding the impact of the impairment charge and a gain on securities in the fourth quarter of 2009, non-interest income was unchanged from fourth quarter of last year.

We recorded a tax benefit of $1.1 million for the fourth quarter. The tax benefit is primarily a 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 year because we do not know the ratio of tax-exempt income to total income in advance.

Lastly, our Board of Directors declared a $0.01 dividend for the fourth quarter, unchanged from the first three quarters of 2009. The Board reviewed our dividend in light of our current market valuation, dividend yield, payout ratio, and our desire to retain capital.

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

Thanks, Gary. This past year was certainly challenging as elevated credit costs throughout the year reflected the recessionary economic environment we have been operating in. As expected, net charge-offs declined modestly in the fourth quarter, as did our provision for loan losses. Despite these challenges, we have been able to consistently provision in excess of net charge-offs, allowing us to build our loan loss reserve. This incremental provisioning has further strengthened our balance sheet, as the allowance for loan losses was 2.66% of December 31st, 2009 versus 1.91% at the end of 2008.

As detailed in our press release, net charge-offs for the quarter were approximately $13.2 million and were centered in the one-to-four-family residential construction portfolio with net charge-offs of $5.2 million, and commercial business loans with net charge-offs of $4.5 million. Charge-offs in the one-to-four-family residential pool were primarily related to land and lot development loans, which remain the most stressed area in this portfolio.

While housing prices appear to be finding a bottom, we have continued to see residential land and lots decline in value. Of the $5.9 million in charge-offs associated with the one-to-four-family segment, approximately $2.4 million was associated with loans which had been previously charged down. Commercial business loan charge-offs continued to be related to businesses in the construction real estate development industries. We also had approximately $1.7 million in commercial real estate construction net charge-offs and these were primarily associated with condominium projects located in the Portland market.

For the quarter, the bank's level of non-performing assets decreased 65 basis points from 4.7% of total assets to 4.05% of total assets. Most of the improvement in non-performing assets was centered in the one-to-four-family construct bucket where we were able to reduce MPAs by 23% or $18.6 million. The reduction was comprised of $11 million in payments, the sale of $3.2 million of OREO, and of course, the $5.9 million in charge-offs, which I discussed earlier. Offsetting this slightly were new non-accruals of $648,000 and $876,000 in construction costs associated with projects, which were not completed when taken into OREO.

Okay, now I will go over the numbers by loan pool and we will begin with the one-to-four-family residential loan portfolio. As of December 31st, 2009, we had approximately $108 million in the residential one-to-four-family construction loan bucket, which was down 49% from December 31st, 2008 and down 62% from the peak in March of 2008. So we have been fairly successful at reducing the bank's exposure in this category, which has been our goal all year. The portfolio can be broken out as follows -- $44.9 million in vertical construction, $28.1 million in lot loans, $22.2 million in acquisition and development loans, also called lot development loans, and $12.3 million in residential land loans.

In total, $47.6 million or 44% of this portfolio is on non-accrual as of December 31st, 2009. In the vertical category, we have $16.7 million on non-accrual, $9.6 million in the lot categories on non-accrual, and $18 million of the acquisition and development loans are on non-accrual. We also have $3.3 million of residential land loans on non-accrual as of December 31st.

By market, King County continues to represent the market where we have the most exposure with $45 million in one-to-four-family construction loans, of which 53% or $24 million are now on non-accrual. We have $36.4 million in one-to-four-family construction loans in Pierce County, of which 40% or $14.5 million is on non-accrual. Finally, the Portland market is now down to around $7.2 million with 35% of this market on non-accrual. In summary, we made significant progress reducing our exposure in this segment during 2009 and we were able to begin reducing our level of MPAs in this segment during the fourth quarter as well.

The commercial construction bucket also declined by approximately $10 million this past quarter. Most of the activity was centered around condominium projects, as $5.4 million was converted to apartments in which we provided a permanent loan, $3.1 million was the result of an auction one of our borrowers had on their condominium units, and the balance of the reduction was due to net charge-offs, again, centered around condominium projects in the Portland market.

This activity allowed us to reduce our condominium exposure from $18.5 million to $8.5 million during the quarter. The balance of the portfolio is comprised of owner-occupied construction loans, which account for $10.4 million, and we also have $23 million in income property construction loans. Activity in these two segments was essentially flat as loan payoffs and conversion to perm loans were offset by advances on projects still under development.

Approximately 39% of our commercial construction loans are on non-accrual, or $16.2 million, which is down $19 million last quarter. The non-accrual loans in this bucket are primarily comprised of $8.4 million in condominium projects, $7.8 million in retail development loans. During the quarter, we added $1.7 million in retail development projects to our non-accruals. However, overall, we are pleased with how we have been able to reduce both our total exposure and our non-performing assets in this category during 2009.

Moving on to the commercial real estate perm pool, despite the pressures building in the commercial real estate markets, this portfolio has remained relatively stable now for the past three quarters. This can be seen in the non-accrual and non-performing asset numbers, which continue to hover in the mid to high $20 million range. The non-accruals by asset class are $10.4 million in warehouse, $3.5 million in gas stations, $2.4 million in office, and then the balance is spread across a number of various property types. Three loans essentially account for about half of the non-accrual loans in this bucket and excluding those loans, the average non-accrual loan in this bucket is about $641,000. So we have a lot of granularity in this bucket.

The commercial business pool saw some modest deterioration during the quarter as non-accrual loans increased from $14.9 million to $18.9 million. However, this still represents only 2.5% of all the loans in this bucket. The average non-accrual loan in this pool is approximately $296,000. Most of our issues in this pool have to do with companies related to the housing industry, such as window and screen manufacturing companies, timber and lumbar companies, and of course contractors.

Our consumer loan bucket has approximately $200 million in total loans, of which approximately $1.4 million is on non-accrual. This is down slightly from last quarter when we had about $1.7 million in non-accruals. The largest component in this pool is our HELOC portfolio, which accounts for $83 million or 42% of the total consumer portfolio. Delinquencies in this portfolio have been running around 1.3%, which is considerably better than the national average, which is 3.26%. We continue to believe our portfolio performs better because it reflects both our customer base, which tends to be older and more affluent, and our underwriting, which is resulting in average credit scores of 752 and combined loan-to-values of 61%.

Finally, we have our one-to-four-family perm pool with $63.3 million in total loans. This portfolio saw a modest reduction in non-accrual loans of $805,000 for the quarter. In total, about 2.9% of this portfolio or $1.8 million is on non-accrual. So overall, it was a good quarter for us from a credit perspective, as we were able to gain traction in reducing our level of non-performing assets in the construction portfolios while the balance of the portfolio, permanent commercial real estate, commercial business loans, residential permanent loans, and consumer loans remain stable.

That concludes my prepared comments and I will now turn the call back over the Melanie.

Thanks, Andy. While we're still challenged by problem credit, and we're not happy with the charge-offs necessitated because of lower real estate values, we are pleased with our ability to significantly reduce our exposure in residential construction loans. In my comments earlier, I mentioned that while we are of course focused on managing our credit issues, we are continuing to move forward with the strategies we've developed to improve earnings and increase our market share.

In December, we opened our new branch in Vancouver and our Portland office, which will house business bankers as well as a full-service branch, is scheduled to open later on this quarter. Our acquisition of Columbia River certainly should help us accomplish these goals as well, helping us achieve our often-stated goal of becoming a true Pacific Northwest Regional Community Bank.

As I said last quarter, Columbia has one of the strongest franchises in the Pacific Northwest. We're very well capitalized with multiple sources of liquidity. We are aggressively managing our credit issues and have a disciplined approach to expense control. Our net interest margin is stable and we have diverse loan and deposit portfolios. We have a well-earned reputation for delivering excellent customer service, resulting in an exceptional core deposit base.

Our business model and our core values have helped us navigate successfully through a difficult economy and to have a strong base from which to operate as the economy improves. I think you can tell I'm very excited about our future and the additional opportunities to come.

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

And now Liza, if you'll open the call for questions.

(Operator Instructions) Your first question comes from the line of Matthew Clark.

Hi, Matt.

Hey. Good afternoon. I'm sorry. Maybe just first on the Columbia River Deal, can you give us maybe a better sense, I don't know if you guys have -- I guess we can talk about this deal. Can you talk to what kind of mark you're assuming on Columbia River? I assume it's close to the threshold amount, but just want to get a better sense as to what that mark might be that you guys are assuming.

You're talking about the mark on the loan?

Yes, the credit mark. I'm sorry.

Right, well as you know that we do have to go through the study to fair market value the loan portfolio and that has yet to commence. But in terms of how we looked at the portfolio in our modeling process, we were estimating losses in the 28% to 32% range.

Okay. And do you have any plans for any run-off? Just trying to get a better sense for the net assets that might be retained here.

I don't have a sense for the run-off of the assets per se. I assume that the loan portfolio would be fairly stable other than the loans that are in process of collection and being handled by our special credits department. I think in terms of modeling, I think we're looking for growth out of the markets that we're getting into with the addition of our staff in Portland and our teams in that area, and so on. So I would assume we would see some growth.

And Columbia River obviously has been restricted because of their capital situation. So loan growth really has not been something that they've been able to entertain and we're excited to add that to the components for them.

Okay. Great. And then obviously I think you've talked about some accretion on the call for the deal, but just want to get a better sense as to what kind of ROA could we assume Columbia River could achieve. I mean, obviously looking back to their history it's probably not a good way to look at it, but just trying to get a sense for how you guys think you might be able to improve the profitability there and the time it might take to get there.

Well, how we modeled the transaction was over a five-year period and at somewhere in the -- between the years of four and five, we modeled a 1% ROA from that transaction. And we tried to be very conservative in many of our assumptions in terms of loan growth and deposit growth. But the end result was the 1% ROAs.

Okay, great. Thank you.

Your next question comes from the line of Adam Klauber.

Hi, Adam.

Good afternoon. How are you?

Great, and you?

Pretty good. Thanks. Clearly, a very strong credit quarter. How confident are you that inflows will remain pretty low going forward?

Andy?

Well, I think that we'll continue to wind out of the construction bucket, although I wouldn't expect that the first quarter, the activity will be as healthy as it was in the fourth quarter just because the single family area isn't all that hot during the winter months. But I think that both Gary and I would agree that we continue to see stress building in the C&I and the CRE book, and so that's why I think we continue to believe that we'll have elevated provisioning for the near term.

Okay. Thank you. Also, to the extent you've been able to sell some property, what type of -- how much on the dollar were you getting that property for? And are the bids starting to come up at all?

We really haven't seen a whole lot of increase in prices as more prices have just sort of bottomed out a little bit in the housing sector. In the one to four resi, which is where we've really had most of the pain, I mean that's working out to be across the entire portfolio about a 30% loss content in there and then on the lots and land, we had cases where that's been as high as 60%. So it's certainly a lot more painful there. On the homes, the loss content on those has been a lot more moderate.

Okay. And as far as the margin, do you think it will stabilize over the next quarter or two?

The margin is still the wildcard I think. I mean, we, as we consolidate Columbia River into our organization, we do have some deposits that we will be repricing over time and I think it's a matter of understanding. But we've only been in this for about a week now, so I apologize that all the modeling isn't complete, but we will have some repricing over a short period of time and how the margin results, we're hoping to have some stabilization I think or a trend by the second quarter.

Thank you very much.

Thank you, Adam.

Your next question comes from the line of Aaron Deer.

Hi, Aaron.

Hi. Good morning, guys, or afternoon rather. Following up, I guess, on Adam's question. The -- it sounds like you're still a little bit concerned about maybe some growing pressures on CRE and C&I, but is it your sense maybe we're at an inflection point here in credit, and would that mean that maybe we could at least see the loan loss reserve build-in stop and maybe hold steady here at this point?

Well, I think as I've kind of described all along, the C&I and the CRE are later cycle credit issues, and so the challenge and one of the things that we really focused on in '09 was trying to resolve and reduce as much as we could the issues in the construction side so that we just wouldn't be piling on top of that. So I still see the overall level of non-performing assets and non-accruals declining in 2010, but I do see a lot of that decline is going to come in the construction bucket. And if you think of a layer cake, there will be layers of C&I and CRE on top of that, but not to the same degree that we've seen in what occurred in construction.

Okay. And then talked a little bit about the -- one of the causes for the, I guess, weakness if you will in C&I growth is line usage being down. Where does that stand at this point and where was that at kind of the high water mark?

I don't have those numbers right in front of me. I actually prepare those for the Board every month. We were in the high 50s at the peak and now we're probably at the mid 40%, mid to low 40% utilization rate.

Okay. Great. Thank you. I'll step back.

Thanks.

Your next question comes from the line of Jeff Rulis.

Hi, Jeff.

Hi, Melanie. Good afternoon. I guess first question would be, any additional appetite on the FDIC assisted in quite a sizable deal here, and just wanted to see if you'd still entertain additional deals.

Well, I guess the first thing that I'd say is you never know when these transactions are going to come up and to the extent that we would be allowed to view the information, I think it would be prudent for us to do that.

Okay. And I guess given potential -- a potential for some deals or other organic growth opportunities, I guess how realistic would TARP repayment be in 2010? Or is that a fair question? I guess, does it not relate to growth strategies, if you could touch on the TARP repayment this year, if that's --

Sure, it's certainly a fair question and one that we discuss with our Board every single month. And what we're weighing the repayment against is other FDIC assisted transaction opportunities and just kind of gauging when we might really see the recovery begin in the economy. So it's probably a little bit too early to reach a conclusion on that yet, but I think that everybody that has CPP money pretty much would like to repay it at this point.

Okay. And you noted a recovery on a non-performing loan, $176,000. Any additional detail on the size or category of that loan, and is that indicative of anywhere else in the portfolio that that could occur again?

That was on the sale of a bunch of lots. It was a rather large sale, so the recovery itself was modest relative to the loan side.

And then lastly, did you guys have a safety and soundness exam in the quarter?

Yes, we did.

Any commentary on, did you have the exit interview and/or how did that, I guess, what you can talk about, how did that go?

Of course, we're so restricted in what we can say, but we had the exit and we had the report back already. So -- and we were allowed to bid on the Columbia River transaction. So I think that that says something as well.

Sure. A pretty good indication there. Thanks. That's it.

Uh-huh.

Your next question comes from the line of Joe Morford.

Hi, everyone. Good afternoon. I guess first just to follow-up on one of the earlier ones, talking about the repricing of deposits at Columbia River, I was just curious how much different were they than where yours were and what kind of opportunity is that?

Mark, do you want to take that one?

Yes. Hi, Joe.

Hey there.

There was some difference probably in the long end of CDs and they had some money market specials. We're going to be looking at that. Clearly, we're going to be stepping those down. We've had a pretty consistent and I don't want to say aggressive, but consistent way that we've handled that here and we're going to be moving towards our model fairly quickly. We will have some flexibility to do regional pricing, however. But you can expect those numbers to be stepped down over the next 60, 90 days. The market there is clearly different than it is on the I-5 corridor and we're certainly going to factor that into our analysis.

Okay. And I guess that was my other question, just kind of along those lines, maybe Melanie you can just talk about the long-term growth prospects for these new markets you're entering into and just for the markets themselves and your bank in those areas.

Well, again, I think that one thing that's important for us all to keep in mind is how restricted Columbia River was in being able to add new loans. They were very, very good at holding onto their core deposits and that was one thing that was very valuable to us. And so I think having our capital and our willingness to lend, that that's going to provide some real growth opportunity. One of the areas that is growing pretty rapidly is the tri-Cities area, the Columbia Basin area and we have branches now there. So we're looking forward to that. But these new teams that we brought on in Portland have already seen some nice growth and Mark, you might want to talk a little bit about that.

Yes, we have Vancouver office, which has been open a little over a month and they have exceeded our expectations already. In fact, they did in a month what we thought they probably would do in the first quarter. Portland, we haven't officially opened the doors and we have had I would say record growth in that operation on the deposit side and they are meeting or exceeding our expectations for loan growth there.

Okay. Great. Thanks very much.

Thank you.

Your next question comes from the line of John Hecht.

Hi, John.

Good afternoon, guys. Thanks for taking my questions. Understand that you guys are -- you're -- you've done a good job maintaining credit kind of coming into the end of the year, but you're still cautious in terms of the CRE portfolio and seeing the credit migration in C&I and CRE. On that note, can you maybe dive a little deeper into the CRE and talk about maturity in 2010 and 2011, your portfolio, where are we based on recent appraisals and loan to value, and debt service and coverages.

Yes, sure. I didn't bring with me the maturity numbers and I apologize for that, but we could follow-up with you on that later. But I think the last time I shared portfolio statistics, just to give you an idea of what we're seeing, loans that are greater than $250,000 that meet certain criteria, we track those fairly closely and it works out to be about $538 million, $540 million of our total CRE portfolio. And when I was looking and talking to folks about these numbers back in July when we were coming out of the second quarter, we had pretty much across the entire portfolio a weighted average debt coverage of 191 and about a 64% loan-to-value.

Well, today, in looking at the numbers in January looking back to December, the debt coverage across the entire portfolio has weakened. It's now 178. That's still a very healthy number, but it does give you some idea in terms of what we're seeing. Now, thanks to payments and not a lot of origination in 2009, the loan-to-value has actually dropped to 61%. And so that's just trying to give you a little bit of flavor of the indicative kind of things that we're seeing in the CRE bucket.

So while it remains stable, certainly these macro trends are of concern.

And given those, I mean again, I understand you guys are being cautious with respect to how you're thinking about provisioning and the allowance levels. But given those statistics, you'd think that at least the loss content is going to be much lower in these types of loans in the construction. So I mean is it there to think given the way we're seeing your portfolio season and given the type of credit we're looking at now that at least the reserve coverage growth, the reserve coverage might stabilize if not come down in the next few quarters?

Well, I don't know if we would actually reduce the coverage, but we certainly won't be growing it to the same extent we have over, say, the last four to five quarters. And I would also agree with your comments that when we stress the portfolio for 20% decline and you pick any number you want in terms of stressing it, the average loan to value goes up to 71%. So I think we may have pain in the book in terms of non-accruals and workouts, and those kinds of issues. But I certainly don't see the loss content that we would have.

So the provisioning would be driven more by risk rating migration, I think, then it would actually be driven by a loss content.

Okay. Great. That makes sense. Thanks very much. And then just thinking about your margins and if you have these figures handy, can you give us a sense for how, what the percentage in your loan book that might be through its interest rate floors. And if so, what is the average that they are (inaudible) forced to give a sense for asset sensitivity in a rising rate environment?

We're all kind of looking at each other and nobody has that information handy.

Okay. It's something we can follow-up with as well. But I appreciate that, guys. Thank you very much.

Thank you.

Your next question comes from the line of [Roger Nichols].

Hi, Roger.

Hi and welcome to the [Dells], and Oregon as well.

Well, thank you so much.

If the FDIC had not seized Columbia River Bank, they might be today making their fourth quarter and year-end statements. From your examination of the Columbia River Bank books so far, would they have reported moving into the black for the fourth quarter?

We don't have that information.

Okay. In both Monday's webcast and today, you stressed considerable cost savings of 25% to 30%. Is that expected anticipation from a reduction in Columbia River labor force? And if so, do you have a timetable?

I'll let Mark take that one.

No, we don't have a timetable. We'll certainly be looking at staffing. I would expect, though, that most of that will be, perhaps, back off duplication. But I have to say, the biggest chunk of that is really in duplications of processing and services. They had some 250-vendor contracts there. We're going to be going through those and there will be a lot of duplication and a lot of that will come from the elimination of the cost related to those contracts as well.

You understand that the headquarters here, right across the street from where, our building at the Dells employ a lot of people and there's some concern locally about that.

Yes, I can understand your concern. One thing we do is we build around people and one thing we've found in the short period of time that we've been partners with Columbia River Bank is they have a lot of really tremendous folks there and that really makes us excited.

And we're not trying to hedge some of these questions, for everybody that's on the line, but in all honesty, we've only known for one week and a day that we were the successful bidder. And there's limited information that you're given. So we're still getting our arms around things.

Certainly. I certainly understand that. Could you share with us when you originally were given the opportunity to bid on the Columbia River Bank?

It's been a few weeks.

Okay. One last thing, I don't know if you yet are aware of it, but in -- I believe in 2002, when the bank's headquarters moved to the building where they are now, they loaned the developer the bank, the money to make the conversion and then leased the bank or leased the top floor back from them. And if you should relocate out of there, will you be running the risk of creating your own bad loan?

Are you talking about the building in the Dells, the headquarters building?

Yes, I am.

Well, we've got a lot of staff and they're going to need to have a place to be. So while we haven't fully analyzed that, I don't think we're going to be creating another problem for ourselves.

Okay. Thank you very much. Appreciate the comments.

Sure. Thank you.

And there are no further questions.

Okay. Well, thank you so much for joining us today and we'll talk to you at the end of next quarter.

This concludes today's teleconference. You may now disconnect.