Columbia Banking System Inc (COLB) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's First Quarter 2011 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, Mishay. Good afternoon, everyone. I'd like to thank you for joining us on today's call to discuss our first quarter 2011 results. I hope you've had a chance to review our earnings press release, which we issued yesterday, just prior to our annual meeting.

With 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.

Gary will begin our call by providing details of our earnings performance for the quarter, including our capital position net interest margin and core deposits. Then Andy will review our credit quality information, including trends in our allowance for loan losses, charge offs in our loan mix. And then I will conclude by briefly giving you our thoughts on the economy in our region and discussing our ongoing strategies for the rest of the year and beyond.

We will then be happy to answer your questions.

As always, I need 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 2010.

And now I'll turn the call over to Gary.

Thanks, Melanie.

Yesterday, we announced net income applicable to common shareholders of $5.8 million for the quarter ended March 31st, 2011, or $0.15 per diluted common share. This compares to $6.8 million for the same quarter of 2010, or $0.24 per diluted common share. These results included a $1.7 million expense to establish a claw-back liability, which was a result of improved performance of the loan portfolios we acquired during the first quarter of 2010.

The claw-back provision in our purchase and assumption agreement with the FDIC requires us to reimburse the FDIC at the conclusion of a loss-share agreement and calculated amount, if total losses failed to reach a certain level.

The present value of the estimated liability will be calculated quarterly and adjusted up or down through a non-interest expense.

For purposes of comparison, it's also important to note that our first quarter earnings last year included a $9.8 million gain, net of tax, bargain purchase gain on our acquisition of a former American Marine Bank. We provided a table in our earnings release showing the impact of the accounting entries associated with our acquired loan portfolios.

The impact was significant, as it resulted in a pre-tax loss of $4.1 million for the current quarter. For the quarter, we recorded $12.4 million in incremental accretions over the contractual rates stated in individual loan notes.

The amortization of our FDIC loss sharing asset was $14.8 million and the claw-back liability was $1.7 million.

The higher incremental accretion income and the loss share asset amortization expense is partly due to loan payoffs in certain pools of loans. The variability of the loss-share results will continue as changes occur in cash flows derived from the loan pools, expected losses and pre-payment speeds, all of which are reviewed quarterly.

Our tax equivalent net interest margin for the first quarter was 5.8%, up from 4.78% for the same quarter last year. The margin was positively impacted by 138 basis points, by our accretion income related to our acquired loan portfolios. It was negatively impacted by three basis points by interest reversals of $276,000, related to loans moving to non-accrual status during the first quarter.

Average interest earning asset yields increased 75 basis points to 6.26% in the first quarter this year from 5.51% for the same quarter of 2010.

During the same period, average interest bearing liability costs have decreased 30 basis points to 6.65%.

Turning to non-interest income, after removing the effect of a $14.8 million change in the FDIC loss-sharing asset, for the first quarter of 2011, and the $9.8 million bargain purchase gain from the first quarter of 2010, non-interest income for the first quarter showed an increase of $700,000, or 8.1%, due to increased volume and service charges on deposit accounts.

As compared to the fourth quarter of 2010, merchant services income was down $164,000, primarily due to the seasonality of the business. Other income, non-interest -- other non-interest income was down by -- from the fourth quarter by approximately $300,000, mainly from a $177,000 decrease in mortgage banking income and a decline of $229,000 in loan fee income from providing interest rate swaps to loan customers.

Our efficiency ratio was 73.3% for the first quarter 2011 compared to 67% for the first quarter 2010. While we have been successfully managing our expenses, the efficiency ratio increased due to increased expenses associated with managing our problem assets, increased regulatory premiums, as deposits have increased, and expenses resulting from our FDIC assisted transaction.

We have also invested in the future growth of the bank by adding teams of bankers and opening new offices. We still expect total expenses, as reported, to continue at these levels for the foreseeable future.

The efficiency ratio is certainly higher than we would like, as loan totals have declined and opportunities to increase our earning assets, such as loans, has been challenging in the current economic environment.

Compensation and benefit costs for the first quarter is up $1.9 million over the same quarter last year, due to the full effect of additional staff added as a result of our acquisitions, hiring new teams of bankers and our de novo branch expansion in 2010.

Compensation is also up by approximately $1.2 million over the fourth quarter of 2010, due to increases in employee benefits and employment taxes.

It is important to note that full-time equivalent staff from December of last year to March 31st has declined over the quarter by almost 30 FTE.

Occupancy expense also increased from fourth quarter and is due to the final settlement with the FDIC for the Columbia River and American Marine branches. We have incurred deferred general maintenance costs, property tax and various equipment maintenance contracts to bring the facilities current.

We recorded a tax expense of $2.3 million for the first quarter, for an effective tax rate of about 28.7%. The tax expense 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, as well as a true-up of our effective tax rate on a year-to-date basis.

Also included in the first quarter number is approximately $475,000 as an adjustment, as we finalized our 2010 tax estimates during the first quarter. We continue to expect an effective tax rate in the range of 20% to 24% for the remainder of the year.

Loan generation continues to be a challenge. Our non-covered loans ended the quarter at $1.88 billion, down $65.4 million from a year ago and down $31 million from the end of 2010.

Our commercial business loan total declined about 2% from December 2010 to the end of the first quarter, at $783 million.

Commercial real estate loans totals are $786 million, down $8 million, or 1%, while consumer loans are down about $5 million, or 3%, and real estate construction loans have declined by about $7 million, or 7%, all compared to last year.

Core deposits continue to be a real strength for us. At the end of the first quarter, they were up $29 million from year-end 2010 to $3.03 million, or 91% of our total deposits. I'm sorry, that was $3.03 billion, or 91% of our total deposits. This is up from 90% at the end of 2010 and 85% at March 30th, 2010.

Our total risk-based capital ratio at March 31st, 2011, was 25.2%, up from 24.5% at year-end. We also measure our tangible common equity to tangible assets. At the end of the first quarter, this ratio stood at 14.2% as compared to 14% at December 31st of last year. We continue to have strong liquidity, with over $2 billion in available funds.

Investment securities also increased over $124 million during the first quarter. We have invested in high-quality securities laddered over a 12 to 36-month average life. These include agency mortgage-backed securities with structures geared to saving most of our cash back in a two to three-year time horizon. We will also add agency bullets and treasuries to the portfolio for cash flow predictability.

Additions to the portfolio now and over the next few months reflect our desire to pick up additional income versus the overnight rate, with an eye toward reinvestment at higher yields over the next two to three years.

Again, our main emphasis is certainly investment quality, but also the structure of the investment to have some predictability of cash flow. We are not reaching for yield.

Lastly, our Board of Directors declared a $0.05 dividend for the first quarter, an increase of $0.02, or 67%. We are certainly pleased to be able to increase our dividend again this quarter.

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

Thanks, Gary. As usual, I will begin my comments this afternoon by discussing our loans not covered under FDIC loss-sharing agreements, which were approximately $1.9 billion as of March 31st.

For the quarter, we enjoyed a modest decrease in our non-performing assets, which allowed us to post improved credit metrics, when measuring our non-performing assets to total assets, excluding covered assets, and our non-performing loans to total loans, excluding covered loans.

Past due loans were also very modest this past quarter, representing only 53 basis points of total loans, excluding covered loans, which was even with last quarter's performance.

As detailed in the press release, we had net inflows of $11.2 million into the non-performing category and enjoyed outflows of approximately $23.7 million, including $5.8 million in net charge-offs.

Charge-offs in the 1 to 4-family residential portfolio were primarily centered in loans, which had been previously impaired and simply represented additional declines in value since our last appraisals. This accounted for approximately $1.1 million in charge-offs for the quarter.

The commercial business pool has the majority of the net charge-offs this past quarter, which accounted for $3.3 million of the charge-offs for the quarter. Approximately $1.3 million of this $3.3 million was associated with the large credit we placed on non-accrual at the end of last year.

The balance of the net charge-offs were spread across numerous loans.

For the quarter, the commercial business pool enjoyed a 15% decrease in non-performing assets, with non-performing assets now accounting for approximately 3.7% of the total non-covered commercial business loan pool, compared to 4.3% last quarter.

The term commercial real estate portfolio exhibited some modest negative migration as non-performing assets in this portfolio increased from 4.7% to 5.3%, quarter-over-quarter.

To date, and through this cycle, though, we have experienced a low level of loss content in this portfolio, and for the quarter, we only had $1.7 million of net charge-offs associated with term commercial real estate loans for an annualized net charge-off rate of 88 basis points.

For 2010, the annualized net charge-off rate was about 78 basis points, which compared favorably to the FDIC's quarterly loan portfolio performance indicators for 2010, in which the average net charge-off rate was 124 basis points.

I would note that we have seen a shift in this pool, away from owner-occupied properties and towards income property loans.

Today, income property loans now account for about 60% of the non-performing assets in this portfolio. This asset mix, though, remains fairly diverse, with no single asset class representing more than 15% of the total non-performing term commercial real estate portfolio.

For the entire non-covered portfolio, both performing and non-performing loans, no single asset class represents more than 25% of the entire portfolio. So it remains well diversified, with warehouse product representing our largest asset class at 22%. The warehouse component is evenly split between income property and owner-occupied users.

In total, owner-occupied commercial real estate term loans were about $330 million, or roughly 42% of the portfolio at quarter-end. The average loan amount in this portfolio was $623,000 at the end of the quarter.

Construction loans are split between 1 to 4-family residential and commercial real estate and in total account for $91 million in loans, or about 4.8% of the non-acquired loan portfolio.

The commercial construction pool has only one loan left, which is now non-performing. Most of the loans now in this bucket were originated after the cycle bottomed out and are primarily to specific owner-users versus income property type deals. The average loan size in this pool is around $2 million, so even for a pool of this size, there is some diversity.

NPAs for the commercial construction loan pool declined to $7.8 million as of March 31st, 2011, compared to $14 million as of December 31st, 2010, but we almost cut it in half during the first quarter of this year.

The 1 to 4-family residential construction portfolio now represents about 3% of our non-covered loan portfolio. So it represents a small pool of loans for the bank.

Roughly half of the loans are in the vertical construction bucket, or approximately $29 million. $14 million is in lots, $10 million in acquisition and development with the remainder, roughly $8 million, in residential land.

King and Pierce Counties in Washington state have the largest geographic concentrations, with 37% and 27% of our 1 to 4-family residential construction loans respectively. Non-performing assets in the 1 to 4-family bucket are now down to around $26.5 million and represent about 23.2% of the total pool. So it clearly continues to represent our most challenged portfolio. However, the loss content was fairly modest this past quarter, when compared to where we were earlier in the cycle.

The consumer portfolio accounts for about 9% of our total non-acquired loan portfolio and home equity loans account for about two-thirds of the total loans outstanding in this portfolio. Contraction in this book is beginning to slow down, reflecting the slowdown in home refinance activities.

We had about 865,000 in net charge-offs in this portfolio in the first quarter, which equates to an annualized net charge-off rate of around 195 basis points.

This also compares favorably to the FDIC statistics for 2010, which showed an average net charge-off rate for similar loans in 2010 of 2.64%.

I believe this favorable performance is a reflection of our above average underwriting statistics, and as of March 31st, the home equity portfolio has an average combined loan-to-value of 58% and an average beacon score of 7 77, which is up from 7 53 last quarter.

It's interesting to note that utilization within the home equity portfolio has declined for the peak of 65% in 2008 to around 47.5% today, which, of course, reflects the more conservative posture consumers have been taking over the past couple of years.

Non-performing assets in this pool are about $6.2 million, or 3.5% of all consumer loans, which is not too bad for this stage of the cycle.

The loan portfolio covered by FDIC loss sharing agreements was approximately $652 million as of March 31st, on a UPB basis, down from $710 million as of year-end 2010.

Commercial business loans contracted the most in terms of dollars, by about $21 million and some of this reduction reflects the seasonal pattern of agricultural loans, which are housed in this portfolio.

From a percentage standpoint, commercial real estate construction contracted by 22.4% or roughly $9 million and was primarily due to problem asset resolution and charge-off activities.

The majority of the portfolio is real estate, with both construction and permanent loans accounting for about 70% of the portfolio, up from 68% last quarter.

Non-performing loans represent about 18.9% of the portfolio on a UPB basis, and this percentage is relatively unchanged from year-end 2010. Of course, these assets are covered under FDIC loss-sharing agreements.

With that, I would like to turn the call over to Melanie Dressel.

Thanks, Andy. As you just heard, we're continuing to make excellent progress in improving our credit quality.

I'd like to spend just a few minutes and talk with you about the economy and the markets we serve here in the Pacific Northwest.

I'm sure you're tired of hearing about a slow recovery. I certainly know I am. But most economists are still currently predicting continued economic pressure on our region, and only modest growth for the rest of the year.

However, modest growth is still a positive trend. Unemployment numbers in our two states, Washington and Oregon, are a mix of good news and bad news.

Washington State added approximately 1,100 jobs during March, but the unemployment picked up just a little bit from 9.1% in February to 9.2% in March. Washington's Chief Labor Economist believes that this could be the many people who stopped looking for work recently reentering the work force.

However, since March 2010, Washington has added about 33,000 jobs. Industries showing gains were professional and business services, wholesale trade, manufacturing, financial activities, mining and logging and leisure and hospitality. Jobs were lost in construction, education and health services, government, retail trade and transportation.

The Oregon jobless rate decreased slightly in March, but the state did lose jobs overall. The unemployment rate for March was 10%, down slightly from 10.2% in February and virtually all major cities and counties in the state reflected better unemployment rates.

This continues the trend of slight improvement in recent months, after hitting a high of 11.6% in June of 2009. But construction lost 500 jobs in March, adding to an overall decline of about 2,500 jobs for the month. Economists believe much of this year's job in the Pacific Northwest will come from smaller companies.

The ports of Seattle and Portland continue to do very well. The port of Seattle broke its cargo volume record in 2010, surprising -- or, sorry, surpassing its previous high in 2005. The total container volume in Portland increased 26% during 2010, with imports rising 36%.

The port of Tacoma is recovering from the loss of a major shipping line to Seattle. New figures show their container volume, which took a big hit in the past two years, has begun to revive, with February numbers up over 15% from the same month last year. And while all west coast ports are currently seeing reductions in trade activity to Japan, as it recovers from the devastation of the earthquake, predictions are that by the third quarter, rebuilding activity will boom with corresponding increases in exports.

As we look at the housing sector, the common theme for the first few months of 2011 is that inventory continued to decline and sales volumes remained consistent with months past. Pressure from foreclosures and short sales are still resulting in decreased home prices year-over-year. Looking at new residential construction in most of western Washington, for March 2011, we're seeing good increases from the prior months, but overall decreases from March of last year.

The same story holds true for resale residential as well. And prices for both new construction and resale continue to fall. In the metro Portland area of Oregon, median prices for new construction are continuing to decline, but at a relatively modest rate. It appears the steep declines may be behind us.

The economies in Washington and Oregon are showing signs of improvement and we are seeing more optimism in terms of job growth and in the housing markets. We were certainly elated that Boeing's bid for the $35 billion contract to build air refueling tankers was successful. Winning the tanker contract secures what Boeing says are 11,000 direct and indirect jobs in Washington state.

That figure includes not only projected jobs at Boeing, and added in-state suppliers, but also at any kind of business, from bars to bakeries, serving the aerospace work force.

The biotech and biomedicals industries are expanding in the South Lake Union area, adjacent to the University of Washington.

And in our headquarters' county, Joint Base Lewis McChord is planning to bring in 1,400 new troops to the base, with the addition of a new combat aviation brigade, bringing the benefits of jobs and business growth for years to come. And Oregon's Intel Corporation is planning to build a new chip factory in Oregon.

While the benefits of all these jobs haven't fully been realized, they should help us recover more quickly than other areas of the country that lack the economic diversity of the Pacific Northwest.

I don't want there to be any doubt at all that I really am very excited about the opportunities we have in front of us. That being said, there are still some challenges as well.

One of our most notable challenges continues to be the slowness of the economic recovery, both to our commercial customers, certainly are feeling better about the economy this year over last, but line-of-credit usage is still tracking in the very low 50s and historically, line-of-credit usage would be in the low to mid-60s. Until we see more line utilization, this will be a drag on interest income. Our loan pipeline is very strong.

Probably as robust as we've ever seen. Much of the loan growth will come from larger banks and from capital constrained community banks, who are unable to accommodate their customers' borrowing requirements. However, it is frustrating that net net loan growth is still challenging.

We continue to monitor the impact of rising petroleum prices and the impact to those industries where this commodity has a major influence. The overall effect to the economic recovery is still a concern.

Increased regulations will also add expense to our industry. We are watching carefully the rule making as it relates to the Dodd-Frank Bill and although there are some signs that there may be some changes or delays in complying with some of the areas of the Dodd-Frank Bill, we know that there will be an impact, the extent to which is the only question.

That being said, as one of the strongest well-capitalized banks in the Pacific Northwest, we are well-positioned for the opportunities we expect in 2011.

We will continue to consider strategic acquisitions, both open bank as well as any banks being closed by the FDIC in the Pacific Northwest. Any acquisitions we consider must still meet our expectations in terms of making financial sense, extending our geographic footprint and being culturally compatible.

Many people ask about the financial metrics we consider in open bank transactions. We look at a variety of things such as internal rate of return, dilution to common shareholders, the period of time in which we would expect to recover the dilution, and many other things.

We also would consider the opportunity to really increase our franchise value in less tangible measures which we believe would be beneficial to our shareholders. We want to continue to increase our share of the market in the communities we serve. We have the ability to attract new customers who are unhappy with their existing banks because they're just not getting the great service that they can receive from us.

And as the economy improves we have great potential for organic growth. We have money to lend and we're focused on growing our loans while maintaining the quality of our loan portfolio. This means continuing to get in front of prospective clients and telling our great story.

Expense control will continue to be a priority this year. We intend to be as efficient as possible in how we deliver our products and services and we have a number of initiatives that we will be rolling out over the next couple of years that we hope will be beneficial. But we cannot sacrifice the level of customer service for which we are known.

We want to continue to be a relationship bank providing full value to our customers as we handle all their banking needs.

This concludes our prepared comments this afternoon. As a reminder, Gary Schminkey our Chief Financial Officer, Andy McDonald, our Chief Credit Officer and Mark Nelson our Chief Operating Officer are with me to answer your questions.

With that I'll turn the call back to Mishay to open it up for calls.

(Operator Instructions). And our first question comes from the line of Joe Morford.

I guess I had a few questions on expenses. I guess maybe first Gary, within the expense line I wondered if you could please quantify the amount of the -- that final FDIC settlement your referenced as well as how much of the comp line you would consider seasonal, for employee taxes and benefits and all?

Well, the settlement with the FDIC was more evident on the balance sheet in the fixed assets that we did. But as far as all the increase that we show here, or pretty much all of it in the occupancy is related to the new branches, West Columbia River and American Marine. There's probably a good -- I want to -- now, this is off the top of my head, say $100,000 in terms of just general maintenance and things that we had to do to get the branches back up to speed.

I don't see that going forward but in terms of renewing maintenance contracts and things like that, of course those would certainly continue for the foreseeable future.

And when you talk about the reported expenses holding at these levels for a while, is that the full $37.5 million or do you exclude that clawback of liability from the run rate?

Well, I'm assuming the clawback [from tax] on that, just because the clawback can go up and down from quarter-to-quarter and honestly I don't know what that could be, even next quarter.

Right. No, I understand. Okay, and just curious how much of the -- that run rate quarterly run would you say is related to all-in problem asset resolution and work out, at this point?

In terms of the -- you're talking about the OREO?

Or -- yes, managing OREO and the legal costs, the workout staff that you've staffed up in and all that, that you expect as credit improves over the next couple of years that you would expect to run down?

Well, you know we have really increased our staff and our special credits group and so on. And honestly I don't have that as a total for you, today, but that's something that I can work on and pull together, or attempt to. The REO expenses change from quarter-to-quarter and in many quarters we have gains on the sale of REO. This quarter we happen to have some -- a sizeable loss on the sale of a REO that we took a write-down.

So that's a variable with REO but as far as the staffing level which included in compensation for special credits, I don't see that changing this year.

Okay, thanks so much.

And your next question comes from the line of Jeff Rulis.

Another one for Gary, on the margins. If I were to read the -- trying to get to that core margin and if I read you right, if core, this quarter was 442, now I'm not -- stripping out the interest reversal for a second, would that be comparable to the previous quarter of like 430? I think you mentioned a 5 basis point benefit, is that correct to what you're thinking?

Yes, it's comparable to the 435 from last quarter since the accretion and the interest reversals pretty much offset each other in the fourth quarter.

Okay.

So it's the --

So it would be more like, if you included the interest reversal, 430 versus 439?

Correct.

Okay, okay. And just a question on the trends in the quarter on a core basis. How did that -- in the quarter how did that by month, did it expand or decline?

Actually, for the first quarter on a core-margin basis it was pretty stable. It really didn't move month-to-month in the first quarter, that much.

Okay.

Sometimes we get a little ramp up in the margin in February just because we have some 33 60 loans and we have 28 days in February, but other than that really no variability that I noticed during the quarter.

Got it. Okay. And then maybe for Melanie Dressel, heard on some other calls, starting to see some banks talking about some failed bank properties being dumped on the market, have you seen any evidence of that in your footprint?

It hasn't been -- there hasn't been a lot, but there has been some. I think that -- and this is just intuitively, it isn't based upon any factual knowledge, I've heard from other bankers in the Pacific Northwest that there have been some banks that have actually been dumping some of their -- or doing bulk sales more in some of the markets. But clearly -- there haven't been a lot of banks where the FDIC has taken on the full responsibility of managing those credit portfolios.

Andy, maybe you've got some other knowledge?

Yes. Most of the failed banks in our area, as Melanie said, most of their assets were acquired by assuming institutions. However, down in the Portland, Vancouver market there were some banks that failed in which the FDIC was unable to get the assuming institutions to take all the assets.

And we have seen the FDIC be aggressive but primarily with lots -- dumping lots and residential lots and land; haven't seen any activity on other asset classes yet.

Okay thanks.

And you next question comes from the line of Matthew Clark.

Hi Matt.

Hey good afternoon guys. On the pipeline you mentioned that it continues to build and it could be the largest it's ever been. Could you maybe quantify that and also tell us how much that might be up relative to year end?

Mark I'm going to let you take that on --- and I'm sorry I didn't bring in the total amount of the pipeline. We usually don't give a number but Mark can give it in general terms.

Well Matt let me just phrase it this way. I would say our pipeline's up about one-third from year end. We've been really looking at making sure the quality and the propensity to close on those credits are really high.

So that by saying that's better than it's ever been and I think it's as clean as its been in our projection and the quality of credit that's in there is very strong and our folks are very, focused.

And our internal campaigns to keep an eye on asset growth are taking hold so I think that all those factors go into our comment about being as strong as it's ever been.

Okay great and then can you just mention or give us or let us know what the costs of HUD assets did in the quarter including maybe the percent change relative to last quarter.

Sure Matt I've got to calculate that though. But I have it. It's just a question of where. So they went down about 11% for the quarter and the level of our watch list now is about equivalent to where we were say late 2007 early 2008. So it's come down quite a bit.

Okay, alright because it had been down I think 27% from the peak and 24% of that I think was --- 24 percentage points of that was last quarter, correct?

Yes I'd have to calculate that to confirm the numbers.

That's alright okay that's alright. And then on the maybe Gary on the core margin being up nine basis points ex all the noise seven basis points with the interest reversals in there.

What's your sense for how we should think about that margin going forward maybe based on what you may be doing in the securities portfolio whether or not you're redeploying some of that cash.

And then maybe other the other variables as well loan pricing and deposit costs and so forth. Obviously it can't get much lower.

Well, we still look to take advantage of deposit costs or the decline in deposit costs as we move forward. I think we still can squeeze out a little bit from that.

As far as deploying the excess cash that we've had that certainly will affect dollars to the bottom line but possibly negatively affect the margin. We still have some investments to purchase in the --- at least into the second quarter and possibly into the third quarter as we ladder those in.

So as far as quantifying what that might do to the margin I don't have a feel for that right now from the investment portfolio. But I would assume that margin would still fall within that range that we talked about and remain very stable.

I would expect that the pickup that we would get in deposit pricing might offset some of that negative pressure from moving the investments.

But moving cash at 25 basis points to securities at 2.5 is ---

Well, it's not really 2.5. Looking at the total it's probably going to be -- if we're looking at a one year for example we're picking up from say 16 to 19 basis points to maybe 70 to 80 basis points. And in the two year you're probably looking at 1%.

Okay

We'll pick up some of that but [then we'll be] offset with that on the loan side especially --- I don't know if Mark wants to talk about this more but the competition on the lending side of the bank is pretty high right now. And we've got competitors that are pricing loans fairly aggressively.

Yes rate and terms both are very aggressive.

Okay.

Matt before we go from peak to trough we're now down 31%.

Great okay thank you. And then maybe just on the deal front can you just update us maybe on the conversations you might be having and whether or not you've been walking away from some things for certain reasons. Just curious as --- just trying to get an update as to what you might be seeing and hearing.

Well I think that there's a good --- it's a good time to be having conversations in for cultivation. I would not say that we've walked away from anything for any reason at this point in time.

But really taking a look at the companies that might make sense for us to partner with is a very, very, high priority for us. And there is still going to be some FDIC acquisition opportunities as well.

We've still got several banks of course they're smaller and you've been hearing that now for the past couple of quarters. But there are still some franchises that probably are not going to make it that would be a nice augment to our footprint.

Okay thank you.

And you next question come the line of Brett Rabatin.

Hi.

Good afternoon.

Hi

I wanted to ask a question regarding the discussion around loan competition and wanted to hear if possible where you're booking --- obviously you have some growth in CNI this quarter.

What's your booking and what kind of rate and terms you're seeing? And what basically is the current yield of the portfolio? And where you're seeing the competition? Is it LIBOR or plus 350 or is it more competitive than that?

Yes well let me start with -- rates are certainly going to depend on what kind of loan you're booking whether it's term loan or line. Yes I would say the competitive rate on shorter term stuff is probably sub-LIBOR plus 300. And terms maybe averaging around that LIBOR plus 300 number.

That's very general. We're looking at everything today. Our primary emphasis has been on CNI owner occupied CRE that relates to our CNI credits.

And occasionally if it's well structured, well priced, we will take a look at an investment grade CRE type credit. Those are primarily what we're seeing out there in the marketplace today.

But clearly there's been a shift away from discipline already on --- in some of the deals that you see.

We just really shake our heads and think how could we have forgotten --- not we but our industry could have forgotten so quickly the hazards of some of the loosening of terms and structure that caused some of the issues that we saw over the last two to three years.

Yes and with all of that said and growth prospects and competition if we're thinking about the CNR portfolio maybe having some growth and construction continuing to abate and maybe commercial real estate also a little bit and payoffs or reductions in the cover portfolio.

Is it fair to assume that the net loan portfolio of inclusive of all that is flattish for the rest of the year or can we see some modest progress in loans?

Well it's hard to predict exactly where it's going to end up. Our goal obviously would be to grow that portfolio and clearly in working hard in getting our pipelines up that's our objective there.

That's going to depend a lot on how well the economy unfolds. What the competitive environment remains for the rest of the year. But we're going to clearly focus on turning those trends around and trying to achieve growth in our portfolio. That's our objective.

One of the areas that we didn't have a lot of ag before we bought Columbia River Bank for instance. And that's a very seasonal line usage product. And we're really anticipating that we'll see some growth in ag just as it reaches the season where they really start using their lines.

But it will be a new experience for us and we're just going to have to work through it the first year to get our arms around what to expect.

Okay and just lastly I was curious -- I know at the shareholder meeting that Melanie talked about Northern Idaho and Boise. Would you consider doing some lending teams there a loan production office in that area until you're able to find the property that makes the most sense to get involved with?

I just laughed because you must have read the article in the news spin this morning. The question actually was posed, "Are there other areas that you would like to be?" knowing that we want to be a Pacific Northwest regional community bank.

And I was actually drawing the line towards I90 across from Seattle to Coeur d'Alene and certainly Boise would be a market that at some point in time we want to be in because you can't be a Pacific Northwest regional community bank and not be in Boise. But that is not on our priority list as soon as some of the other areas in between. The central part of Washington we still have room to move up and down the I5 corridor.

So in terms of actually putting a lending team in some of that other markets that is one way that we really considered doing expansion rather than do an acquisition. And if we get the right group of bankers in a market where we want to be yes we would consider opening up and LPO.

But right now we don't' have any team that we're looking at to open up an office in either Northern Idaho or Boise.

Okay great thanks for all the color.

And your next question comes from the line of Aaron Deer.

Hi Aaron.

Hey good afternoon everyone, just a couple of quick thoughts. One is Melanie mentioned the --- your concerns about the Dodd/Frank impact on revenues.

So I'd suspect that you might be referencing the Durbin Amendments in particular. Can you talk about what level of the income comes from interchange fees?

Mark do you have that handy.

Yes do you want me to address that or?

Yes.

Through the first quarter of this year our interchange fees were just over $1.2 million gross. We do tend to see as the year progresses more activity through the summer travel season and into the beginnings of the holiday season. So those numbers are probably up a little bit third/fourth quarter from that average.

And the projections are that if the Durbin Amendment is enacted the way that it's being proposed that it will have a 60% to 70% decline in revenue for that type of business.

But there are other segments that I think are going to be affected by the Dodd/Frank bill. And those rules still haven't been written but they're all in the consumer protection area. And it's just really unclear now whether or not they're going to impose restrictions on collecting fees in a wide variety of ways.

So there's just so much up to 300 new regulations that could come out of Dodd-Frank and whenever you've got that many you just have to assume that even if we had to monitor it that it would require more expense.

Okay that's helpful. I appreciate that. The --- and then a follow up on Joe's question on the expenses. The --- I --- maybe I missed it but did you say how much of the comp expense on the first quarter might have been seasonal in nature due to FICA and that sort of thing?

Well in the first quarter we talked about employee benefits and employment taxes moving up. Sequentially comp and benefits are up $1.2 million.

It's not in the compensation line. It's more in the benefits. We've had some --- we are self-funded in our group benefits medical plan and we've had some -- experienced some higher expenses in that area.

Of course we're also subject to employment taxes here at the first of the year. So realistically when you include merit increases and so on over the course of the year I guess I wouldn't expect that number to fall dramatically over the course of the year. Or even stay constant.

Okay well then Melanie you'd mentioned some longer term initiatives that might cut expenses. Is there anything else that can be done near term given the revenue pressures that might help the bottom line?

Well, if you're talking about dramatic decreases in expenses on --- we're working on expenses all the time to decrease them and to become more efficient in things like how we handle paper.

But I really believe that the most important thing for us right now is growing our top line revenue. And we're doing that through a wide variety of loan initiatives.

And I believe that some of the new products that we have to offer like trust services although it will be nominal for the --- for this year. We do have some new non-interest income sources that we're really hoping to grow.

Alright that's very encouraging thank you Melanie and everyone. I appreciate it --- taking the time.

Thank you.

(Operator Instructions). And there are no questions from the phone line.

Okay, well thanks everyone for joining us and we'll talk to you next quarter.

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