Columbia Banking System Inc (COLB) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's Fourth Quarter and Full Year 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 Sara. Good afternoon, everyone. And thank you for joining us on today's call to discuss our fourth quarter and year 2011 results. I hope all of you have had a chance to review our earnings press release, which we issued earlier this morning. And it's also available on our website, columbiabank.com

I'm happy to say we had a good quarter and a successful year. With me on the call today are Gary Schminkey, our Chief Financial Officer; and Andy McDonald, our Chief Credit Officer; and Mark Nelson, our Chief Operating Officer will also be available for questions following our formal presentation.

Gary is going to begin our call by providing details of our earnings performance for the quarter and the year, including the financial benefits of our FDIC assisted transactions, our capital position, net interest margin, and core deposits. Andy will review our credit quality information, including trends in our loan mix, allowance for loan losses, and our charge offs.

I will conclude by giving you our thoughts on the economy here in the Pacific Northwest and give you a brief outline of our strategies as we move forward in 2012. We will then be happy to answer your questions. I need to remind you as always 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, in particular our Form 10-K filed with the SEC for the year 2010. With that I will turn the call over to Gary to talk with you about our financial performance.

Thanks, Melanie. Good afternoon, everyone. Earlier today we announced earnings of $14.8 million for the fourth quarter ended December 31, 2011, or, a $0.37 per diluted common share. This compares to $12.6 million for the same quarter of 2010, or $0.32 per diluted common shares.

While our results were materially influenced by our FDIC assisted transactions, we enjoyed a strong net interest margin, quarter-over-quarter loan growth, and improving credit metrics. We've provided a table in our earnings release showing the impact of certain accounting entries associated with our acquired loan portfolios.

The net effect of our acquired loan accounting resulted in additional pre-tax income of about $8.6 million for the current quarter. This compares to additional pre-tax income from acquired loans of about $7.7 million for the quarter ended September 30, 2011.

In the current quarter we recorded $17.2 million in incremental accretion income over the contractual interest rate stated in individual loan notes accounted for under AFC 310-30. The change in our FDIC loss sharing assets was $17.4 million. And the SCIC claw-back liability was $362,000. In addition, we accreted $9.2 million into income from the discount on the Bank of Whitman acquired loan portfolio.

You may remember this portfolio is not covered by any loss sharing agreement, and was for the most part a relatively clean portfolio. As a result, we do not apply AFC 310-30 accounting treatment. But rather accrete the discount in the same fashion as we accrete net deferred fees on originated loans.

Generally the discount is accreted in income over the term of the individual loan. However, certain loan activity such as prepayments in full result in the remaining discount being accreted to income immediately. Such activity makes it challenging to determine an expected run rate. The variability in earnings resulting from the accounting for the FDIC assisted transaction will continue as changes occur in the timing and amount of future cash flows.

Expected future cash flows for certain of the acquired loans are reviewed at least quarterly. Our tax equivalent in net interest margin for the fourth quarter was 7.14%, up from 4.35% for the same quarter last year. The margin was positively impacted by 246 basis points as a result of the additional accretion of income related to our acquired loan portfolios.

Year-to-date our net interest margin was 6.27% as compared to 4.76% last year. The year-to-date in net interest margin was positively impacted by 176 basis points as a result of additional accretion of income related to our acquired loan portfolios, which was partially offset by 2 basis points for interest reversals of $753,000 related to originated loans migrating non-accrual status during the year.

Average interest earning asset yields increased 108 basis points to 7.42% in the fourth quarter of this year from 4.84% for the same quarter last year. The increased yield is due to additional accretion income over the stated loan rate. Partially offset by lower prevailing loan origination rates.

During this same period, average interest bearing liability costs have decreased 28 basis points to 41 basis points. Interest bearing liability costs have decreased during the fourth quarter by approximately 9 basis points from the third quarter of this year.

Turning to non-interest income. After removing the effects of the change in the FDIC loss sharing assets, gain on investment securities, and the impairment charge on investment securities, non-interest income for the fourth quarter 2011 showed an increase of $819,000 or 8.3%. Due to increased volume in service charges on deposit accounts. And merchant services fees when compared to the same period last year.

Some line items, other non-interest income decreased by $80,000 as compared to the fourth quarter of last year. Primarily from the third quarter of this year due to a decline in loan fee income. Specifically, we booked approximately $435,000 in non-recurring SBA fees in the third quarter of this year. The impairment charge on investment securities relates to a single municipal obligation. On December 1, 2011, the Greater Wenatchee, Washington Regional Events Center Public Facilities bond went into default.

Although we remain hopeful that the city of Wenatchee, Washington and other county officials will fulfill their obligation to fully repay bond holders, we have no information at this time to justify a value other than zero. We will continue to pursue all remedies for repayment of this obligation. Our efficiency ratio was 59.6% for the fourth quarter 2011, compared to 65.3% for the same quarter last year.

While we have successfully managed our expenses, the efficiency ratio increased due to additional expenses associated with adding 18 branches to our retail system this year; two core system conversions; and from managing both our covered and non-covered problem assets.

Compensation and benefit costs for the fourth quarter are up about $4.1 million over the same quarter last year. Due to the effect of additional staff from our FDIC assisted transactions. We recorded a tax expense of $5.7 million for the fourth quarter, or an effective tax rate of about 28%.

The tax expense is lower than our marginal rate as a result of earnings from our tax exempt municipal securities, along with other tax exempt investments such as bank loan life insurance and affordable housing partnerships. As we had anticipated, the year-to-date effective tax rate was approximately 27% for the full year 2011.

Turning to the loan portfolio, we categorized the loans acquired from our Bank of Whitman transaction as discounted loans, which are included with our originated loans in the non-covered loan portfolio composition. Not in the covered loan category. Our non-covered loans ended the quarter at $2.35 billion, up $432.6 million from December 31, 2010, up $90.5 million or 4% from September 30, 2011.

Comparing to September 30th of this year in a link quarter basis, commercial business loans increased $47.9 million or 4.9%. Commercial real estate loans increased $21 million or 2.1%. Real estate construction loans increased $7.5 million or 9.4%.

At the end of the fourth quarter core deposits were up $45.7 million from September 30th of this year. The increase in core deposits is coming from non-interest demand accounts, increasing $51.4 million during the quarter. Interest bearing demand up $23.3 million. Our ratio of core deposits to total deposit has increased from 90% at year end 2010 to 91.3% at September 30th; to 92% at year end.

Our tangible common equity to tangible assets at year end was 13.3% as compared to 14% at December 31st of last year. Investment securities increased $32.3 million during the fourth quarter. We continued to seek opportunities to invest our excess cash and typically add investments with the duration of three to five years. Our main emphasis is certainly investment quality, but we also evaluate the structure of the investment to have some predictability of cash flow. At this point, I'd like to turn the call over to Andy McDonald, our Chief Credit Officer. Andy?

Thanks, Gary. I would like to begin my comments by discussing our originated and discounted loans, also referred to as non-covered loans, because they are not covered under FDIC loss sharing agreement. These loans represent about $2.3 billion or roughly 81% of our total loan portfolio. Covered loans account for the rest and approximately $537 million. As Gary discussed earlier, during the quarter our non-covered loan portfolio increased approximately $90 million.

Consistent with prior quarters, the majority of our loan growth has been in commercial business loans and long-term commercial real estate loans. Growth in our commercial business segment was centered in professional services, health care, and wholesalers. Offsetting this growth was contraction in our agricultural and seafood portfolios of around $10 million, which was expected due to the due to the seasonal nature of these portfolios.

The commercial business bucket continues to be well diversified with no particular industry segment accounting for more than 15% of the entire portfolio. Our largest segment is health care and social services at 14%, followed by manufacturing at 10.9%. All other industry concentrations are 10% or less. Growth in the terms commercial real estate loans was evenly divided between owner occupied and income property with each accounting for about 50% of the increase during the fourth quarter.

The demand for termed commercial real estate loans is certainly one of the bright spots for commercial lenders these days. With rates being where they are and so it's allowed us to continue to be selective in choosing the deals we want to do.

In looking at the deals we closed in the fourth quarter, the average loan to value is 58%. The average debt service coverage ratio was 1.42. That's using an underwriting rate of 7%. Our originations were primarily centered in multi-family, which accounted for about 40% of our new termed commercial real estate loans for the quarter. Retail was second at around 10%. Hotel and motel was third at 9%.

In total, we booked about $58 million in new termed commercial real estate loans during the fourth quarter. Commercial real estate construction loans also increased modestly during the quarter. Again, the primary driver in this bucket was multi-family projects.

Looking at our non-performing assets -- we were pleased to continue to see these decline during the quarter. They now represent about 2.02% of non-covered assets as of December 31, 2011, down from 2.15% as of last quarter and 3.23% as of the end of last year.

As detailed in the press release, we had inflows of $5.2 million in the non-performing category and outflows of approximately $9.1 million. For the quarter we had modest additions to the NPA bucket and our net charge offs were also the lowest they have been in quite some time. For the quarter our provision for allowance for loan losses was $4.75 million. It can be segregated into $2.75 million for our originated portfolio and $2 million for the establishment of reserves for our discounted loan portfolio. The provision for originated loans was primarily driven by growth in both the originated loans from September to December of approximately $125 million.

I would characterize the overall performance of the portfolio as stable during the fourth quarter. In looking at our commercial business pool, NPAs were essentially unchanged. It's $19.9 million or roughly 2% of the portfolio. This is down though from around 4.3% at the end of 2010. Commercial business non-performing assets account for about 23% of our total non-performing assets. The term commercial real estate portfolio saw NPAs decline from 3.1% as of last quarter to 2.8%, which compares favorably again to the end of last year when NPAs in this pool were 4.7%.

You might remember that NPAs in this pool peaked at 5.3% in March of 2011. At year end, termed commercial real estate NPAs were around $28 million or 33% of our total non-performing assets as of year-end. One to four family residential construction continues to be a large portion of our NPAs at 23%. However, we were able to reduce the absolute total amount of NPAs in this bucket by 38% during the course of the year. One to four family residential NPAs are down to about $20 million, which is significantly lower than their peak when they were slightly over $80 million.

The commercial real estate construction bucket accounts for about 8% of our total NPAs. Is comprised in most part of three projects, which in total account for about 7.1 million in non-performing assets. The three projects are a condo project, a retail strip center, and an industrial development project. The largest project is the condo project, at $3.7 million. The smallest one is the retail strip, which is about $1.3 million. Loans not covered by FDIC loss sharing agreements, which were past due at quarter end approximated about $12.4 million, or roughly 53 basis points -- up modestly from last quarter's 45 basis points.

Loans acquired under FDIC loss sharing agreements were approximately $709 million as of December 31st on a [UPB] basis, down from $786 million last quarter. So the pace of resolution within the pooled or covered loan portfolio was where we made the most improvement during the fourth quarter. While not (inaudible) is non-performing for financial statement purposes due to the nature of pool accounting. Pooled assets with those types of characteristics declined 16 million in the fourth quarter. Represent about 29% of the total covered portfolio.

For the year, we actually saw an increase due to the assets we acquired in the First Heritage and Summit transactions as we began the year with $155 million. Past due loans covered under FDIC loss sharing agreements were just over $11 million, or around 1.6% of the total covered portfolio as of the end of the year. With that, I would like the discussion back over to Melanie.

Thanks, Andy. While our economy here in the Pacific Northwest mirrored the slow growth of countries the whole last year, we are seeing encouraging reasons for more optimism as we move forward in 2012. We still have major challenges, of course, particularly in the unemployment rate, the housing sector; and with the state and local governments cutting expenses and employment as revenues fall.

However, the Pacific Northwest has a diversified economy and you've heard me say that for a long time. It is the top state in the country for foreign exports and the outlook for Boeing, our region's largest employer has rarely looked better. The company has over seven years of commercial orders to fill. That's about 3,500 orders. They added 7,000 new jobs over this past year. The 787 has launched. Last month, Boeing and the machinists' union signed a four year labor contract, which ensures that the 737 Max will be built right here in Renton, Washington.

We're also happy to have Costco, Microsoft, Amazon, and REI headquartered here. They were just ranked by consumer reports among the top 10 companies with the best consumer policies and customer service. Consumer confidence is rising and retail sales rebounded, particularly in the sales of automobiles and electronics. Local economists believe the housing market is stabilizing. Even the home prices have continued to fall.

We've seen a significant number of sales of the distressed properties, which has lowered the average home price. In Washington State, the trend over time is showing that jobs are gradually increasing. The employment rate is coming down. In fact, the Puget Sound region is outpacing the nation in terms of job growth. The jobless rate was below us nearly three years, decreasing slightly to 8.5% in December from 8.7% in November.

The national rate was also 8.5%. State officials say that between December 2010 and December 2011, overall employment in Washington was up about 30,000 jobs. The areas that saw the most growth were in education and health services, manufacturing, and the transportation warehousing, and the utilities sector. Sectors with job losses included professional and business services, retail trade, hospitality and leisure, construction, and government.

Oregon's economy has been growing more slowly and it's total number of jobs has remained relatively flat for almost a year. However, the jobless rate is improving and was 8.9% in December, dropping below 9% for the first time in three years. Manufacturing, construction, and financial sectors have shown sluggish job growth. Last month's job gains were driven by the leisure and hospitality sector in Oregon, which typically loses jobs in December.

But, instead they added jobs. The sector saw a particularly strong growth in restaurant employment. Similarly, local governments eliminated fewer jobs than they typically do in December, creating a net gain in the seasonally adjusted numbers. Despite the lackluster economy last year, we were still able to make significant strides in organic loan growth.

We expanded our geographic reach in the Pacific Northwest. We continued our methodical progress in resolving problem assets in both the covered and the non-covered loan portfolios. I think this positions us well to continue our progress in becoming a leading Pacific Northwest regional community bank.

Of course, effective capital management is very high on our priority list. Although, we are continually considering acquisition opportunities, you can see from our dividend payout that we are not anticipating the need to accumulate capital. Our special dividend of $0.29 combined with our regular dividends of $0.08, represents full payout of earnings for the quarter.

As Gary indicated, our efficiency ratio is not where we want it to be for the long-term. Although masked by the five FDIC acquisitions we completed over the past two years, we have been managing our expenses very closely. We can't forget the efficiency ratio is also driven by revenue. Revenue growth has been slower than we would like as a result of the slow economy.

We expect total expenses as reported to continue at basically the ---- at these levels for the foreseeable future. Although we should see some marginal improvement following the full operating system conversion in integration of the Bank of Whitman over the next few months. As the economy recovers and revenue generating opportunities resurface, we believe we are in a strong position to grow revenue much faster than expenses. This will give us the opportunity to grow into the new areas of our footprint.

However, I don't want you to think that we are sitting back just waiting for the economy to improve. As evidenced by our loan growth, we are actively taking market share to increase earning assets. At the same time, we're working on the expense side of the equation as it relates to being more efficient in ways that we deliver our products and services.

The uncertainty of the economy will continue to influence our performance in 2012. But we feel confident Pacific Northwest and its very diversified economy, along with the footprint and infrastructure we have built will put us in a good position to thrive over the years to come.

With that, this concludes our prepared comments this afternoon. This is 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. Now, Sara, let's open up the call for questions.

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

Hi, Aaron.

Hey, good afternoon, everyone. Melanie, maybe it's a starts ---- follow-up on your comments regarding capital management. It sounds like there's nothing eminent in any way in terms of M&A opportunities. Given your comment and the dividends, the special dividends certainly attractive as a way to put money back to shareholders. But I didn't see -- it didn't look like you were very active, if at all with the share buyback. I'm wondering what your thoughts are in that going forward?

Well, if we disclose last quarter, the shared buyback is out there and can be used at any time. [I took] references that it doesn't appear that there are any M&A opportunities eminent. I guess that I would say that that is true today. But I don't want to signal that we're not thinking that there could be one in the future. I just don't want you to jump to that assumption immediately.

Fair enough, and then Gary with respect to the margin. I was wondering if you could give us a sense of with the core margin. What were some of the strengths that held that up in terms of mix during the quarter or, yields or funding costs? What's your outlook on that core margin going forward?

Look, for the fourth quarter the core margin increase was a result of work that we've done on the cost of our core deposits. We've taken down some rates, specifically in money market accounts, for example have come down dramatically. It's brought our average cost of interest bearing deposits down to about 30 basis points. It came down about nine basis points from last quarter. That's the major factor of the margin increase where lower origination rates for new loans coming on the book.

Given the current rate environment and competitive landscape, I think that's going to be with us for quite some time. I think going forward into 2012. You look at our cost of deposits. There's not a lot of room to move those going forward. Although, with rates staying down, I would imagine there would be some pressure on new rates that we bring loans on the books.

Okay, that's helpful. I'll step back. Thank you.

Thank you, Aaron.

Your next question comes from the line of Dave King with Roth Capital Partners.

Hi, Dave.

Hi. I guess first -

Hi, Dave.

First off, maybe talking about the core margin a little bit and the prospects. Following up on that, it looked like some of the benefit you got this quarter was also just from the redeployment of cash into securities. You still have a fair amount in those balances. I guess, Gary, how should we think about the potential to bring some of that stuff down going forward? Any kind of benefit you can get from that?

Yes, that's a good question. Because see, as we receive cash back from the existing portfolio, we're still going through that analysis of how fast that could potentially come back given the new rated drop. What we learned yesterday, and what rates would we redeploy those funds either into loans or new investment? Given that, I'd like to bring the cash balances down a little further than where they are.

Currently have in the neighborhood of $200 plus million in cash overnight. That's still a little high, I believe. We certainly don't want to give up on the opportunity costs of what we could be earning. I think we would continue to invest in the three to five year range. Although, we still have some analysis to do on what have changed in the investment world since yesterday.

Okay, that's helpful. Then, on the loan growth this quarter, to what extent was some of that coming from existing customers versus new customers? Is it namely just some of the market share gains you guys are having with (inaudible) and all that? Or is there some new and criminal demand you're seeing out there? How should we just think about the potential for growth going forward?

Mark?

Yes, that's pretty much new incremental demand was what drove the expansion that we have there. But clearly, we're talking with our existing clients, too. Looking for all opportunities, it may have been new projects that somebody had gotten into, or taking business away from our competitors.

Then the prospects going forward, do you think for that? Is it sustainable, I guess, at this kind of growth rate given everything you guys see today?

It could vary from quarter to quarter, but I think our activity is uniformly strong throughout the footprint as far as our focused on building a new business, particularly as we assimilate some of our new footprint. Getting those folks into the process, I would see us continuing to grow as Andy mentioned there are no -- there were opportunities out there.

We're certainly going to position those where they make good sense for us. We're going to be well underwritten. We've got to discipline around pricing. We're seeing pricing pressure, clearly. But that just means that we're focused on the strongest credits that were probably put on the books.

Thank you very much.

Thank you.

Your next question comes from ---- RBC Capital Markets.

Hi, Joe.

Hi, there everyone.

Hi, Joe.

Just following up on Dave's question a bit -- you talked about loan pricing. I would be curious, particularly in the commercial real estate portfolio, where you said you've been able to be a little more selective. Just kind of what types of rates are you putting new loans on the books these days?

Andy, would you like to comment on that?

Yes, the spreads are in the neighborhood of 275 to 300 basis points.

Okay. Has that changed much from the past quarter? Or, has it been pretty consistent?

It's been fairly consistent this year. We'd like to see it a little bit more than that, but it is ---- the area in competition has been more in loan dollars than in the commercial real estate area, where we tend to lose it in so much on the rate, but lenders who are willing to lend more dollars than we are.

Okay, that's helpful. The other question was just maybe, if you could talk a bit more about the decision to increase the quarterly provision to nearly $5 million or so. The kind of core basis, especially given the drop in charge offs. I know you talked about growth being a factor there. But, just what can we think about for a run rate in 2012 given your outlook for growth?

Yes, now the provision is split between two components. About $2.7 million, $2.8 million was driven by the originated portfolio. Where we had net charge offs of around $2 million to $3 million. There was a little bit of build there in the portfolio. But again, that portfolio grew in excess of $125 million.

$2 million was associated with the establishment of a reserve for the Bank of Whitman loan. When they were initially valued a couple of quarters ago, we didn't have to have a reserve at that time for those loans. Because essentially they were placed on the balance sheet at what their value was, which included a credit mark. Now that we move away from that date, we have to establish a reserve for those loans. The interesting dynamic here is that the discounted portfolio by its nature is a liquidating portfolio.

I would say that the run rate looking forward will probably mirror more of what you see in the originated side of the house. Than what you see with the originated and the discounted combined.

Okay.

Does that make sense?

Very helpful. Yes, that's great. Thanks.

Thanks, Joe.

Your next question comes from the line of Jeff Rulis with D.A. Davidson.

Hi, Jeff.

Hi, Melanie. Good afternoon. Just a follow-up on margin again. Gary, I missed the core margin in Q3 comparable to the 468 in Q4?

I am looking for that quarter's press release, but I don't have it from last quarter. I'm sorry. We're looking around the room to see anyone else that has it here. Sorry.

Gary, just a follow-up I guess on --

The core margin is up slightly. I can give you a call.

Okay.

Over that little ---- with more detail, Jeff.

All right, I appreciate it. Gary, I guess a follow-up, or maybe for the other call. But, Gary, you've talked about in the past about the core margin eventually returning to that historical. I think you said 430 to 450 range. Has that assumption changed at all?

No, that hasn't.

Okay.

No, as we get down to a base level of interest bearing deposit costs, which I think we're approaching, the competition for new loans as Mark and Andy have talked about is still very intense. We would expect the deposit costs to hit their bottom very soon. Then the new arrangement ---- new loan origination rates to continue down.

Okay. I guess the other accounting noise. More a question on when do we kind of get to that historical level or range? I mean, are we quarters or years away on the margin for when we're back talking about that? I mean, I know that's a tough question, but your projection on that?

Well, that is a tough question. I guess to answer it today, I think we're quarters away. We still have a good base of loans. Until they are either repriced or new loan originations start to overtake that pricing, I still think we're a few quarters away from returning to that historical margin range.

Got it. Okay. And Melanie, I think I missed your commentary on the capital management regarding the dividend. I guess, how do we view just the dividend portion? Both the regular and special? I mean, if you look at Q4, I guess that's a 35% payout. But, then if you look at kind of what's coming in Q1. I guess, are you going to continue to use that special dividend just as a quarter by quarter basis? Or, maybe additional color on the dividend only decisions would be helpful?

Yes, I wish that I could give you a better idea of the future. But, the way that we approach our dividend each quarter and the reason why we have all of the different components as opportunities out there for deployment of capital is that we take a look at the landscape of what we see coming in the quarter ahead.

I just can't give any more information than that. Other than the fact that certainly with the capital levels the way that they are, we don't feel a compelling reason to accumulate more capital. But that does not mean that we're not looking for opportunities to deploy it. By doing acquisitions or just looking at other opportunities for capital.

Okay, thank you.

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

Hey, good afternoon, I'm sorry.

Hi, Matt.

How are you doing? Can you give us the amount of discounted loans at the end of the quarter for the Bank of Whitman?

Andy, do you have that?

The balance?

$162 million.

Okay, thanks. And the core margin last quarter I think was 459. Was that up 9 basis points?

Good, thanks, Matt.

Yes, save you a phone call. Then, out of the $17.2 million of accretion on the pulled loans that you've realized this quarter. I guess, I'm just trying to split out how much of that was from disposal gains relative to just the hair coupon.

Disposal gains?

How much of that was kind of earlier payoffs on that pooled portfolio? Trying to get from ---- I'm basically just trying to differentiate between the yield on covered loans. The yield on covered loans excluding that disposal income.

I think that may be something we'll have to work on.

Okay, that's fine.

(Inaudible). Because originally I thought you might be talking about the early payoffs of the discounted portfolio. Versus the pooled portfolio. Is that (inaudible)?

No, that's separate. I guess that's the 9.1. I've got that. That's what, 11 left? Eleven million left on the discounted loans?

Yes.

That will come into income. I think over ---- I think it's last quarter by the end of this year. Is that fair, still?

The majority of it, yes.

Okay. All right, and then on the deposit growth just continues to get. The mix just continues to get better. I'm just scratching my head how you guys can continue to do that. But, can you give us a sense for how much of that might be seasonal if at all? Or, is it just really just new relationships coming over some more of the troubled banks in your markets?

Mark, would you like to give some color to that?

Yes, we do see seasonality in our deposits. Some with the business focus that we have. Clearly a lot of our business customers at year end are accumulating cash for their dividend payouts. Their employee benefits payouts, that kind of thing. Particularly professionals, they tend to have payouts at the end of the year.

We do see some seasonality. That's the seasonality that we've seen in the new footprint. Mirrors what we saw in the legacy Columbia Bank footprint. There isn't a huge difference there. We continue to emphasize relationship as we put new loaned relationships on the books. We're getting new deposit base out of the new loans that we're building and relationships we're building out of that loan generation. Our folks are really focused on our existing clients -- looking for opportunities talking to them.

And so I would say that we continue to expand with our existing customer base as well. It's really across the board. What we've done historically, we continue to do. It shows up in that pattern. Clearly though, we're not emphasizing high rate deposits. So, what we are putting on is core deposits, non-interest bearing and that's what driving our numbers.

I think that one of the other reasons why we've been so successful. It's not as though we're out on ---- offering high priced CDs because we want to grow deposits. At this point in time, we just want to grow a relationship. And the fact that we were voted #1 in Washington State for safety and soundness by Forbes, that certainly helped as well.

People are still concerned about the safety and soundness of their banks. We have a really good story to tell.

Great, and then I guess the last one. On your view of reserving -- I think, previously we had expected, or, I think there was some indication that your reserve coverage might start to come down with all the improvement in credit. It sounds like the latest growth you guys are putting a little bit more on the sidelines and then some. Just curious whether or not you are thinking differently about reserve coverage here. Maybe you want to maintain two-plus percent reserves in this environment on non-covered or not?

Well, we don't have a target as to a percentage that we want to be at, or, percentages that we would want to be above or below. I think as I expressed before, we have had, and we continue to see in this quarter as well, an improvement in the loan portfolio; which has allowed us to essentially lower the percentage of the allowance relative to the loans covered by it. If you sort of set aside the fact that we had to establish a provision for a bucket of loan.

We built a provision by the couple of hundred thousand in this quarter. I'm not really sure that that should be viewed as changed in what our expectation is. As I mentioned before, as we continue to resolve more and more of these assets, the rate in which the provision as a percentage of the buckets is going to climb will become more modest. Because there will be less credit improvement for the portfolio for which the provision would benefit from. I think as we continue to look forward, that number should stabilize. But we don't necessarily have a target for it.

Okay. Thank you.

Thank you, Matt.

Your next question comes from the line of Brett Rabatin with Sterne Agee.

Hi, Brett.

Hi, good afternoon, Melanie. I was actually kind of wondering the same thing about the reserve. I guess it will play out over the next year or two. But it just to me, I guess seems like the reserve levels would decline giving your asset quality trends. What it seemed like your provision would be very minimal, if not zero in 2012. Maybe a little different angle on that, but was curious about that.

Then just, you sounded a little as optimistic maybe on M&A. I was just curious if there were less talks going on or, if the bid ask spread was pretty wide? Or, if there were other factors you were thinking about in terms of the lease in your term on M&A that were restrictive?

Well, I think that pricing expectations are certainly one of the biggest considerations and figuring out if the deal is going to make sense. Getting those closer together is probably an important piece of the equation.

I do believe that there are banks that really do believe that now would be a good time to combine with a partner, where they can really provide the products and services to their customer base, and also be able to leverage the expense that everybody is going to need to put in to just complying with regulations and technology.

So, I think that the biggest obstacle, well, there are a couple of considerations that make deals more difficult. One of course is pricing expectations. The other is mark on loan portfolios. But, as I've said, the last few quarters, I'm probably more optimistic than many about the possibility of being able to do deals. I just don't want us to give up on that, because I do believe it's a good time to partner. If you're a smaller organization that is looking for a strong partner.

Does the market exist basically with everyone thinking they're a buyer? Or, they're not really in ---- still a position to sell? I know you mentioned that there are banks that want to sell. That I hear in a lot of locations that it's just everyone thinks they're a buyer?

I wouldn't say that that is necessarily true in our part of the world.

Okay. Great, thanks for the color.

Thank you.

(Operator Instructions). Your next question comes from the line of Joe Stephens with Stephens Capital.

Hi, Joe.

Hi, how are you?

Great.

All of my questions have been answered. I was going to ask on the dividend again. Because you have so much capital, but I won't. But congratulations on a really good quarter and year. Thank you.

Thank you, Joe.

At this time, there are no further questions.

Okay. Well, thanks, everyone. I just want to thank all of you who have covered us and been investors with us this last year. We're really hopeful that 2012 is going to be another great year for all of us. Thank you very much.

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