Fulton Financial Corp (FULT) 2005 Q4 法說會逐字稿

Please stand by. We are about to begin. Good day, everyone. And welcome to today’s Fulton Financial’s fourth quarter and yearend 2005 earnings conference call and webcast. This call is being recorded.

At this time, I’d like to turn the call over to Ms. Laura Wakeley. Please go ahead.

Good afternoon, and thank you for joining us for Fulton Financial Corporation’s conference call and webcast to discuss our earnings for the fourth quarter and for yearend 2005.

Your host for today’s call is Scott Smith, Chairman, President, and CEO of Fulton Financial Corporation. Joining Scott is [Charlie Nugent], Senior Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information included with our earnings announcement, which we released at 4:30 yesterday afternoon. These documents can be found on our web site at fult.com by clicking on investor information, and then on news.

Please remember that during this webcast representatives of Fulton Financial Corporation may make certain forward-looking statements regarding future results or future financial performance of Fulton Financial Corporation. Such forward-looking information is based on certain underlying assumptions, risks, and uncertainties. Because of the possibility of change in the underlying assumptions actual results could differ materially from these forward-looking statements.

Risks and uncertainties that may affect future results include: pricing pressures on loans and deposits, actions of banks and non-bank competitors, changes in local and national economic conditions, changes in regulatory requirements, actions of the Federal Reserve Board, credit worthiness of current borrowers, the Corporation’s success in merger and acquisition integration, and the customers’ acceptance of the Corporation’s products and services.

Now, I would like to turn the call over to your host, Scott Smith.

Good morning. We appreciate both your interest and investment in Fulton Financial Corporation, as well as your participation in this call.

Before I begin I want to express my thanks to Rufus Fulton for the strong and successful leadership he provided to the Corporation over the years. As you know, Rufus formally retired at the end of the year, but we are delighted that he will continue his association with the Company as one of our Directors.

The Corporation’s new six-member Senior Management Team is now in place and the transition went very smoothly. I am particularly pleased that our management training, succession, and development programs enabled us to fill each of the available senior management positions from within the Company. Our Management Team looks forward to meeting the challenges and opportunities that lie ahead.

Before Charlie Nugent discusses our financial performance, I want to share my personal thoughts on the year just completed. I trust that you all have had an opportunity to review our earnings release and financial attachments.

Given the challenges within the industry we were generally pleased with our financial performance for 2005, although I will tell you we had hoped to do better. Clearly, our greatest challenge was the flat yield curve which placed additional stress on our net interest margin. But despite that pressure we were able to sustain our margin and experienced no erosion throughout the year.

In the fourth quarter we experienced good loan growth, along with strong growth in certificates of deposit. Asset quality also remained strong. Our investment management and trust services subsidiary, Fulton Financial Advisors, also gained traction in the fourth quarter; a trend we hope continues into 2006.

Expenses excluding acquisition…

[Audio Interruption.]

Ladies and gentlemen, please do not disconnect. Again, do not disconnect. You are still connected to the call. Once again, ladies and gentlemen, please do not disconnect. Stand by, one moment.

Again, your line is open.

Thank you. Scott, can you continue?

In 2005 we successfully converted three new affiliates, Somerset Valley Bank, First Washington State Bank, and Resource Bank, to our standard operating platform. We continue to view our conversion expertise as a key strength for the Company.

We received regulatory approval from the Fed yesterday for the addition of what will be our 15th affiliate, Columbia Bank; and we expect to complete this acquisition in February. Columbia will give us a strong geographic presence in the dynamic Baltimore, Washington corridor and is contiguous to markets already served by our Maryland and Virginia affiliates.

In the last six months Fulton Bank, our largest affiliate, began operations in Center County, Pennsylvania, in the town of State College. We’ve been watching the potential in this market for some time. Since there did not appear to be near-term acquisition potential we decided to deploy a loan production office in anticipation of future branches. We believe the State College market offers good growth potential, and we’ve seen good loan activity thus far.

And now I’ll turn the call over to Charlie Nugent, our CFO, to review our performance in detail. Charlie.

Thank you, Scott. And good morning, everybody. We’re happy that you’ve joined us for our first conference call. We’ll try to be as informative as possible. Please make a note of any questions you may have, as I review our results; and after I’m finished we can respond to them.

As the number of analysts covering our Company has grown it has become increasingly difficult to speak with all of you as promptly as we would like. As a result, we felt it was time to start holding conference calls, and we hope you agree.

We reported diluted EPS of $0.26 for the fourth quarter, which is flat with last year and down $0.01 a share from the last quarter. The decline from the third quarter resulted from the settlement of a litigation matter that was disclosed in the Form 8-K which we filed last Friday. The litigation was related to alleged violations of the Telephone Consumer Protection Act by Resource Bank, one of our affiliates, prior to our acquisition.

The settlement resulted in a pretax charge of $2.2 million or $0.01 a share after tax. We believe this matter is now behind us and we do not expect that there will be any additional significant charges related to this matter.

Now, for the year diluted EPS was $1.05 compared to $0.99 in 2004. We adopted FASB Statement 123 in the third quarter of this year and restated previously reported earnings. As a result, net income for 2004 was reduced by $3.3 million or $0.02 a share. There was no impact on diluted EPS for the fourth quarter of 2004 as a result of the restatement.

The highlights of the quarter was strong loan growth. If we annualized the linked quarter, the growth would be 9.5%. We had strong growth in time deposits, approximately 8.6% annualized. We had good asset quality. We had growth in our investment management and trust services. If you look at linked quarter and you annualize it it would be about 10.3%. And we had also experienced flat operating expenses.

Now, offsetting these positive trends were a decline in mortgage banking income of linked quarter of 28% and a lack of growth in core deposits. On a linked quarter basis net interest income increased $1.4 million or 1.3%. This increase was primarily due to balance sheet growth as our net interest margin did not change. Average loans increased by $145 million or 1.8%. And at December 31st, 2005 approximately $50 million of residential construction loans held by Resource Bank that were previously reported as loans held for investment, reclassified to loans held for sale. So, on a comparative basis if you look from third to fourth quarter, you’ll see that our loans actually grew by $195 million or on a linked quarter basis 2.4%.

Now, the category showing the strongest growth was construction loans with growth occurring throughout our franchise, but primarily in Virginia, Pennsylvania, and New Jersey. Commercial loans grew only slightly, approximately 1% on a linked quarter basis, and the remaining categories all showed modest growth of approximately 2% on a linked quarter basis.

Our asset growth was primarily funded by a combination of deposits and short-term borrowings. Average deposits increased $78 million or 1%. This quarter we saw strong growth in certificates of deposits which on average increased by $71 million or 2.1% on a linked quarter basis.

With the increases in short-term interest rates we’ve seen customers becoming more price sensitive. This is a trend that if it continues will drive the total cost of our deposits upward. And, like all banks, we’re trying to prudently manage these costs.

Demand and savings balances were flat from the previous quarter. The net interest margin has remained constant at 3.92 this quarter, the same as we reported in the second and third quarters of this year. We were hopeful that the Federal Reserve Bank rate increases would strengthen the margin; however, offsetting the Fed increases has been the impact of the yield curve flattening.

On a year-to-year basis we saw margin expansion of 9 basis points from our 2004 margin of 3.84%. We do not expect any significant increase in the net interest margin until we see a steepening in the yield curve.

Asset quality continues to be very strong. Nonperforming assets were just 38 basis points of total assets at December 31st compared to 39 basis points of total assets last quarter and 30 basis points in 2004.

While the nonperformings increased from last year the level is still very low on an absolute basis. Net charge-offs were at 9 basis points in the fourth quarter compared to 2 basis points last quarter and 9 basis points for 2004. The YTD net charges were only 4 basis points compared to 6 basis points last year. The relatively low level of loan loss provision for the quarter and the year are the result of our detailed analysis of a loan portfolio. Our goal was to maintain our excellent asset quality levels, but as we all know, levels this low will be a challenge to sustain in the future.

Another significant item impacting our fourth quarter results was our mortgage banking income. Gains on the sale of mortgage loans declined by $2.1 million or 28% on the linked quarter basis. This was due to both declines in volumes and spreads on sales, especially the spreads on servicing released mortgage sales. Loans sold decreased 14% from $710 million in the third quarter to $6.10 million in the fourth quarter, and the total spreads narrowed by 18 basis points.

We were pleased to see good growth in investment management and trust services on a linked quarter basis of 2.6%. This growth was both in brokerage and the more traditional asset management fees. Other fee categories showing growth on a linked quarter basis were cash management, up 2.2%; debit card fees, up 9%; and letter of credit revenues, up 9%. Investment security gains were relatively flat at just under $1 million.

Operating expenses were up $1.2 million or 1.5% on a linked quarter basis. However, without the litigation charge they have shown a $1 million increase. Our efficiency ratio for the fourth quarter was 56.7; without the impact of the litigation charge it would have been 55.2 as compared to 55.5 for the previous quarter.

Salaries and benefits were down almost 1.2 million or 2.5%. About half of that decline was due to decreases in certain bonus categories as a result of decreased mortgage volumes and profitability. The remainder was in the benefits category, primarily due to continued favorable experience with our health plan.

Occupancy and equipment expenses were down slightly due to some volume related rebates received under certain bank equipment contracts. Data processing costs showed a slight decline due to conversion costs paid in the third quarter for the Somerset Valley acquisition. Advertising expenses were higher in the fourth quarter due to the timing of various promotional activities, and the increase in other expenses was due to the litigation charge.

Now, we’d be glad to answer your questions.

[CALLER INSTRUCTIONS.]

We’ll take our first question from Fred Cummings, KeyBanc Capital Markets.

Yes, good morning, Scott, Charlie.

Good morning, Fred.

Yes, Charlie, can you first talk about what’s going on with your home equity loan portfolio? I didn’t see that broken out in terms of what kind of linked quarter growth trend you’re seeing there.

Yes, Fred, we linked those with the residential mortgages and year-to-year we were up 9.4%.

Okay.

And on a linked quarter basis – I’m trying to give that to you, Fred – we were up – it was relatively flat. We had some good growth in residential mortgages, in adjustable rate mortgages that we kept on the books, and that was in the beginning of the year. That’s kind of slowed now. People are going back into the fixed rate product.

Home equity lending and the use of home equity lines was stronger in the first six months of the year and that kind of slowed off in the third and the fourth quarter, also.

And then, Charlie, I just wanted some clarification then on your margin guidance. My sense was that you had, you heretofore you had been more bullish on the margin assuming the Fed were to stop raising rates. Now, it sounds like you think the margin, the direction of the margin is more dependent on the slope of the curve even after the Fed stops raising rates. Is that the case, Charlie?

Yes, it is the case, Fred. And it’s primarily because of we priced our commercial real estate loans at a fixed rate based on yield curves, so the pricing – we considered competition but we put out suggested pricing, so the suggested pricing is down because of the lower cost of funding and the lower yield curve.

And our investment portfolio which is extremely short, it’s an average life of 2.78 years, we have $452 million coming in this year, the yield is at 3.87; and we were kind of hoping to reinvest that three into the five-year area. We were thinking that we would pick-up 30 to 40 basis points more than we’re picking up. So, that’s, that kind of changed our opinion a little bit.

Okay.

Does that answer your question?

Yes, it does. Thank you.

You’re welcome.

We’ll go next to Rick Weiss, Janney Montgomery Scott.

Good morning.

Good morning, Rick.

Good morning, Rick.

I was wondering if you could talk about asset quality? I know we’re coming off a very low base, but it did look like nonperformers ticked up and charge-offs exceeded the provision this quarter; and kind of like what are your thoughts on that and where would you expect the loan loss reserve ratio to go?

Well, Rick, this is Scott. Generally, in asset quality we continue to experience what historically is pretty phenomenal quality. As you mentioned, it did tick-up a little, and while it did it still, the numbers are still pretty good. And I don’t expect to see a significant change in asset quality short-term. I think, as Charlie mentioned in his comments, we can’t expect it to stay where it’s been the last couple of years, but I don’t see anything out there that says, you know, there’s a rapid change coming.

Hey, Rick, this is Charlie. I had the same impression when I looked at it, but you have to remember, you know, a couple of minutes, you know, the charges for the fourth quarter were $1.8 million. It’s still only 9 basis points. So, in a loan portfolio it’s over $8.5 billion. So, even though you’ve seen it tick up it’s still extremely low.

Oh, right. No, I’m not worrying now; I’m just wondering what you would see the absolute level of the loan loss reserve, you know, it’s like 1.18 a year ago, and now it’s down to 1.10. Is it going to go down, you know?

Rick, that’s driven by the model we run all of that through to come up with what it needs to be, and that’s, you know, it’s a consistent model, and those are the numbers.

Okay. And let me ask about, like I guess just the competition. I know it’s tough, but is it particularly tough in any given market? You operate in several different States? Or is it kind of like the same across the board regarding deposit gathering and loans?

I would say fairly similar across the board. We anecdotally hear of similar experiences from most of – you know, the competitors change from market to market, but there’s always, there are always some out there a little more aggressive than we’d like them on the deposit pricing side. And quality loans has always been as of, you know, intense competition for those. But I can’t isolate any market and say it’s more intense in that one as opposed to others we’re in.

Okay, great. Thank you.

You’re welcome.

We’ll go next to Collyn Gilbert with Ryan Beck.

Thanks, guys. Good morning.

Good morning, Collyn.

Good morning.

I can’t believe there’s an actual call! I’m still in shock over this whole situation, but anyway.

We’re going to miss talking to you, Collyn!

Probably our conversations are going to be all of 2 minutes versus normally 25 minutes. I’m not sure what I’m going to do with my day!

Anyway, just as a couple – let me follow-up to Rick’s question on the competition side, primarily on the deposit side. Are you all running – I think I recall in the third or maybe second quarter you ran some deposit promotions, are you still aggressive in that regard or where do you see some of the deposit pricing trends and sort of gross trends coming?

Collyn, we’re always concerned about our cost to function and that. But we have been promoting certificates of deposits because rates are going up and we think our customers are more price sensitive. We have promotions that are relationship driven.

And, for example, on our lead bank we have a 13-month CD at a 3.75, 3.75%. If they have their DDA balances with us they would receive an extra 25 basis points. And in the 25-month category it’s a 4.50 yield and we would add an additional 25 basis points if they have our, have their core accounts with us.

And we don’t think those rates are out of line with rates in general, especially Fed funds; and we’ve been, we were up, and we had tremendous growth, I think, tremendous growth for us in certificates of deposits that if you annualized it it would be 8.6%.

Do you think that some of these promotions will start to ease a little bit or maybe the pricing is going to soften a little bit, or are you not seeing any of that yet?

I think that’ll depend on demand, Collyn. If it continues to be strong banks are going to need funding. And part of this is just an acceptance of the rate levels that are now available by customers.

You know, we would have loved to have had people stretching out for 1.5% six or eight months ago, but they just weren’t ready to do that. But once CD rates got in the high 3’s, 4% area customers began to say, ‘okay, that will do,’ and began putting money back into CDs. So, I think it’s a combination of lots of things, but I think the pricing and the deposit, pricing will depend on loan growth.

Okay, okay. Talking about the securities portfolio, Charlie, you had mentioned, what was it – 200 and some odd million had run-off in ’05?

No, I’m sorry, Collyn. I mentioned that this year, 2006, we would have about $540 million maturing in cash flows at a 3.87, and that would be reinvested at higher rates. And we, in our budgeting we were expecting the yield curve to be a little bit steeper; and the reason, you know, the comment from Fred was ‘why do you think your margin might be flatter than going up?’ And part of the reason is the pricing on our commercial real estate loans and the reinvestment of those proceeds coming off our investment portfolio.

Got you. Okay, okay. And then just, also, to Rick’s question about reserve, maybe ask it a little different way – as long as your unallocated portion, because I know that that’s the one that you wrestle most with, but as long as we see that increasing would we assume then that the overall reserve level is going to continue to come down? When you talk about your model, Scott, and you have a number shake out, is that a big driver of that?

Say that again, Collyn?

Just the unallocated portion of your reserves, if that continues to increase, will we see the overall reserve to total loans decrease?

I don’t think there’s a correlation there. Again, it depends on the portfolio at the time we do the analysis. And, you know, the number is what it is when we compute it.

Okay, okay. And then just, finally, I know it’s early yet but just maybe if you could give us a sort of a preliminary update on Columbia and how that’s going?

Well, as you saw, the Fed approved the merger yesterday, and so we await Maryland Banking regulators’ approval and expect to get that fairly soon. And our plan now is to do the merger in early February assuming that Maryland comes through this week with their decision.

It’s a great – you know, we’ve already been meeting with the folks there and working out, you know, the lenders coordinating activities and those kinds of things; and, you know, just feeling very good about the chemistry and the markets there. And we continue to be very impressed with the Management Team, and so we’re feeling very good about that.

Any negative surprises coming out as you’re doing your due diligence?

No.

Okay.

You know, Collyn, they’re doing extremely well at Columbia. They haven’t released their fourth quarter earnings. I think they’ll do that next week, but for the nine months their EPS were up 26%, their asset quality is stellar, strong loans, strong deposit growth; and I think it’s an opportunity for us to introduce all our fee related products down there. So, that should help our fee income next year. And it’s a great bank with great people.

Okay, great. Thanks, guys.

You’re welcome.

We’ll go now to Andy Borrmann with Sun Trust.

Hi, guys. I think Collyn hit just about all of my questions, so. I think she took her 25-minute phone call, God bless her! No, no worries. Good quarter. We’ll see you guys later.

Thank you, Andy.

Thanks.

And we’ll go now to Wilson Smith with [Sony].

Good morning, gentlemen. Nice quarter.

Good morning, Wilson.

I think between Rick and Collyn I must have to echo Scott’s comments. But let me just follow-up a little bit more. Charlie, how much, how many more rate increases are you guys factoring in in your modeling? Are you going with two more?

Yes, in the budget we have two more. We had one on – at the end of January, and then one in May.

If it holds that and then the yield curve stays flat then you’re just – you’re going to have very modest, if any, improvement in the net interest margin?

Yes, we would think, you know, I can’t predict the future – I have trouble with – Collyn will tell you on numbers, not a problem with the past numbers but can’t predict the future. But I would expect our margin would stay stable or creep-up. And there are going to be some things, Wilson, that are going to come in there. We’re going to issue $150 million in trust preferred at the end of this month. That’ll hurt our margin a little bit. Columbia Bancorp has a very strong margin, in the 470s; that’ll help us. So, if you, even factoring those things in I think our margin is going to stay pretty stable. We’re moving up, I would think. But I can’t, I have trouble with the past numbers, let alone predicting the future, so.

Don’t worry, so do we sometimes!

Loan demand will impact that, as well; if we get more than we expect in terms of loan growth then that will certainly help. Some of those funds that Charlie talked about. Even if the yield curve stays flat if we get them invested in loans instead of security that’ll help a little bit.

Yes, Scott, I mean you guys talked a lot about the deposit side throughout the franchise. What – in terms of asset generation are you seeing any particular strength in any particular markets?

Again it’s pretty well spread-out, but, you know, the strongest markets are Virginia and New Jersey. Central Pennsylvania is doing all right. Really, all our markets are about where we’d expect them. So, again, there isn’t anyone that’s really way outperforming others.

And just in terms of Columbia, there was, I guess a release came out saying one of the executives down there had resigned. You said the chemistry is pretty good. Are you expecting to lose many other people down there when you complete the acquisition?

No, that was an internal matter there and that was not a major issue as far as we’re concerned, and we still have good rapport with the Management Team and things. I don’t expect any significant changes other than that one.

Okay. And, Charlie, how is the – just in terms of asset quality, I think we’ve probably beaten that to death pretty much here. But what about the watch list, does that – is that stable, or what do you see, what kind of trends are you seeing there?

I think it’s almost exactly the same. There are no changes, no changes, at all.

Great. Thank you very much.

You’re welcome.

We’ll go now to Adam Barkstrom with Stifel Nicolaus.

Hey, guys. Good morning.

Hi, Adam.

Hi, Adam.

Let’s see. Hey, Charlie, you kind of toward the end of your comments there you were talking about the decrease in compensation expenses. The first part you said half of that was mortgage company comp related with the decline in volumes.

The bonuses, yes.

And then you said the other half, you said something about healthcare expenses, could you just elaborate on that?

Yes, Adam, we switched our healthcare provider, and our experience has been very favorable.

What does that speak – what do you mean?

Our healthcare costs are going down.

You – are we kind of at a base level now, or are we going to see some more efficiencies recognized in the ’06 from that, do you think?

I would think we’re at a base level.

Okay. On the mortgage banking front, you mentioned that spreads – and I assume that meant gain on sale spreads.

Yes.

Were down 18 basis points. What was the actual level? Do you recall?

What, the rates?

Yes, what was the actual spread amount? Because down 18 basis points, what?

I’m not sure. I’ll have to get back to you on that, Adam.

Okay, all right.

You know, the spreads went down 18 basis points so it’s primarily related to servicing release spreads at Resource Mortgage in Virginia. The spreads at Fulton Bank remained pretty constant.

Okay. Would you say, was Resource, I mean how much of the volume did they drive versus traditional Fulton?

In the fourth quarter their volume out of the $610 million they had about $460 and the rest was Fulton Bank and the other affiliates. They’re a pretty heavy driver of mortgage originations.

Okay. I guess kind of back to looking at the, you know, you guys talked about the flat yield curve environment, et cetera, and sort of tweaking that margin guidance, or margin expectations down a little bit; I guess one thing that maybe I was a little not shocked but just a little surprised to see, you know, use of borrowings obviously the fund is secured – I mean you can’t be getting hardly any spread on that, to speak of. What were the thoughts there in fourth quarter as far as, you know, it looks like you layered on a little bit of leverage there?

You know, Adam, I was thinking, we paid-off $82 million in Federal Home Loan Bank advances as they matured. There’s a cyclical trend in the deposits in the fourth quarter where usually our quarter deposits go down, so that was replaced with Fed funds. Those funds usually come back in February.

They do? Okay.

But there was no rationale, there was no – I mean there was no purpose, in buying investment securities and funding it short.

Okay, okay. Yes, I guess if you just look at sort of the end of period numbers they kind of then give an accurate picture. So, you’re anticipating these borrowings numbers to go back down first quarter, is that…

Usually there’s a cyclical trend in deposits in December. Usually we’re down, especially in DDA balances, that comes back in February.

Okay.

I don’t know if it has to do with the holidays or the – I imagine it has something to do with the holidays and also with people making their tax payments.

Okay. And then you may have touched on this, maybe I didn’t catch it, but the l23R adjustment, obviously that didn’t hit fourth quarter of last year -- what, did it hit the prior three quarters, or was it…

No, it just hit the third quarter, Adam.

Okay.

Because we – our options vested immediately so we would have to recognize that expense when they vest, so it was all evenly in the third quarter of last year.

Okay, so did you guys…

2004.

Right. Did you guys re-release new numbers on 3Q ’04?

Yes.

Are they in this press release, or are they somewhere else?

No, they’re in those – we have restated those numbers.

Okay.

They’re in there.

Great. Thanks a lot.

You’re welcome.

We’ll go next to Tom Doheny at Sandler O’Neill.

Hi, good morning, guys.

Morning, Tom.

Just to follow-up on FAS 123R, you mentioned for 2004 it only hit the third quarter.

Right.

For 2006 is there, I mean as a result in the fourth quarter of ’05 was there any impact had you not adopted FAS 123R?

No.

Any estimate of, you said there was like a $3.3 million for ’04, any estimate of what that will be for year ’06?

I would say it’s about a penny a share.

Full year?

Yes.

Great.

And, you know, Tom, one thing, we, our options just vest immediately, and we had a new plan come in. Our old plan matured. And when the Compensation Committee reviewed that they decided to make our options vest over time, and it was more of an employee retention strategy as opposed to the financial or an accounting affect.

Great. And, you know, moving along, you mentioned I guess on, with regard to the acquisition strategy, maybe looking beyond the Columbia deal. You mentioned I guess specifically the State College market in Pennsylvania, but any particular markets that you’re looking for in terms of expansion beyond the Columbia acquisition?

Well, you – I think you’ve seen our maps in the past, where we color in the areas contiguous to where we are now. And as you know, banks get sold, not bought, so we have to be opportunistic and practical when we look at what’s available in the markets that are similar to where we are now.

So, it’s hard to isolate a particular market to say we want to be there because if there’s not a bank for sale you either have to wait or do what we did in State College and say, ‘we’re going to do some branching into that.’

That’s what we’ve done to some extent in Chester County, which is the County between us and Philadelphia; just could not wait any longer in terms of acquisition so we began to do some branching two years ago, and that’s working out very nicely.

So, we’ll continue to weigh those opportunities as they come up, and where the market demographics and everything else looks better than it might in another situation we’ll be a little more aggressive, and where it doesn’t we’ll be less aggressive.

Great. And then, you know, Charlie, as you ran through the decline in the expenses in the fourth quarter, sort of ex the litigation, you know, it seems like some of these items I guess were obviously some related to mortgage. You mentioned I guess some expense savings from your vendors, but I guess my take was that some of this was sort of onetime in nature or your nonrecurring expense savings in the fourth quarter. I guess I’m wondering is that really the case or are you sort of making, you know, getting some traction on expense cuts going forward, and should that follow-through into ’06?

Yes, I think we’ve been pretty good at controlling expenses. And if you looked, if you look at our internal expense growth, if you take out the affect of our acquisitions at Resource, First Washington, Somerset Valley, our expenses are only up 2%. So, you know, we were pretty happy with that. I think we’re pretty good at controlling expenses.

Great. I appreciate the call, guys.

You’re welcome.

We’ll go next to Matt Schultheis, Ferris Baker Watts.

Good morning.

Good morning, Matt.

I have a couple of quick questions. Could you go over the loan detail again? You came-up with 2.4% loan growth and your release shows 1.2. I think you said you reclassified some stuff and maybe sold some stuff. Could you just go over it again?

Yes, Resource Bank when they booked construction mortgages they put them – and when the permit was done they were going to sell it. They included that as in loans for investment, which is fine. We categorized that as loans for sale so we just made that switch, and when you make that switch instead of the…

How much was that?

It was $50 million.

Okay.

And so if you look quarter to quarter the strongest growth rate was in construction, it was up 5% on average.

Okay.

Commercial mortgage was right behind that, at a little over 2%, at $50 million. And commercial was a little bit slower, Matt; it was only up 1%. So, if you annualize that it’d be 4%.

Right.

The – usually, our lead bank has about $1.6 billion in commercial loan lines and only 32% of that is drawn-down at the end of the year. Usually that’s at 37% or 38%.

Okay.

So, if they would have utilized their lines, we would have had another, you know, 5% or 6% growth in commercial, that would be about $80 million.

So, if I move the $50 million back in to loans, you’d say you had loan growth of about $149 million for the quarter?

Yes, $195 million.

$195 million.

Right, and it would be a growth rate of 2.4%.

And on the commercial side do you see that trend continuing with people just not tapping into the line as much?

Well, there was an article, you know, they talked about the 50 top economists in the Wall Street Journal. They were pretty optimistic about business spending and the growth in inventories and capital items and just more confidence in the commercial area with corporations. Our lenders feel that way. Our lenders are feeling that there’s going to be good growth in commercial loans. The people, our small business customers are more optimistic about the future, and they should draw-down more and lend more.

Okay.

Hence, the theme of that article. And I think that our lenders feel that way, also.

Okay. With your equity securities portfolio what’s your level of unrealized gains in there?

Now, we have, at the end of the year we had unrealized losses of 1.7 million.

Okay.

And the bank stocks are up a little bit since then, so it would be down a little bit. We’ve never been at a net loss before.

Okay. And I’m sorry if you’ve discussed this already, your deposit service charges on a linked quarter were down slightly. Is that a customer behavior or were you waiving fees for promotional purposes? What do you think happened?

The one thing is the credit rate, the earnings credit rate on corporate accounts is higher as rates move-up. And still when we look, customers have relatively higher balances in their accounts, and they’re avoiding some service charges that we used to see in the past.

Okay. Thank you very much.

You’re welcome.

We’ll go next to Bob Hughes, Keefe Bruyette & Woods.

Hey, good morning, guys.

Hello, Bob.

I’m just about tapped out myself. I thought I’d ask kind of a side question. I know that you’ve experienced some pretty strong growth in construction and commercial real estate lending over the past couple of years, and certainly that’s been I think a key driver of Columbia, as well, too. What comments might you have on the recent guidelines issued by regulators surrounding commercial real estate? Have you gotten any initial feedback, does it change the way you approach the business, are you doing anything different today than you had in the past?

The basic answer is no, we’re not changing anything in the way we’ve done. As you probably know, we’re fairly conservative lenders to start with, and so our guidelines are relatively speaking conservative to the industry, in general. We are obviously watching commercial real estate and all affected real estate very carefully as we’re going through at least a slowing of the growth rate that we had been experiencing before.

But we have, we’ve reviewed those guidelines. We have a lot of internal measurement systems in place that I think the Fed is going to be requiring from everyone in terms of monitoring of exceptions and general activity of how much of the capital is committed to it and those kinds of things, but we’re not at a point where we feel like it’s an issue for us.

However, having said that, some of our newer acquisitions that were primarily focused on that kind of lending have already begun diversification plans to try to build the other loan portfolios to levels so that as we grow the commercial real estate portfolio we’re also growing consumer and C&I lending so that from a diversification standpoint we can maintain that risk management that’s available there.

Good. That’s helpful, Scott. And could you give us a sense for what percentage of your commercial real estate portfolio is owner occupied?

The last time we did the math it was in the 60’s. We do a lot of small business lending and, you know, we take the real estate because it helps tie-up the customer and it helps secure whatever kind of loan we’re making. And many times in small business lending that’s, if you will, the capital base for the company. So, we have a lot of real estate loans that weren’t made to buy the real estate but were made to finance the growth of the company.

Okay, all right. And not to harp on this point, I understand that your MPAs are coming off a very low base, but, nonetheless, up I think 70ish percent since the first quarter. Is there any particular asset class or region where you’re seeing that deterioration?

No, no, and it’s just the typical kinds of things that happen when you have a loan portfolio that pop-up from time to time that you need to work-through.

Okay, very good. Thanks, guys.

You’re welcome.

Yes, you’re welcome.

We’ll go next to Fred Cummings, KeyBanc Capital Markets.

Yes, Charlie, can you give us an update or refresh our memories with respect to your stock repurchase plans for ’06?

Yes, Fred, the Board approved an accelerated stock repurchase plan of 4.3 million shares. And right now they follow the Safe Harbor rules, that Morgan Stanley buys that back for us; and they have repurchased 2.1 million shares. So, they still have that 2.2 to go.

Okay. Thanks, Charlie.

You’re welcome.

And, ladies and gentlemen, due to time constraints today we’ll only able to take one more question. The final question will come from James Record with Moors & Cabbott.

Hey, good morning, guys.

Good morning, James.

This will be an easy last question. You gave the unrealized, but what’s the market value of the bank portfolio?

It’s about $77 million.

Okay. Thanks, guys. Have a good day.

You’re welcome.

You’re welcome.

Ladies and gentlemen, that does conclude today’s question-and-answer session. I’ll turn the conference back over to Mr. Smith for any additional or closing comments.

Well, thank you, all, and that concludes our call. And we enjoyed chatting with you today. And please plan to be with us again in the first quarter of ’06 on April 19th at 10:00 a.m. Have a great day.

And once again, ladies and gentlemen, that concludes today’s call. Thank you for your participation. You may disconnect at this time. 1

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