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Columbia Banking System Inc. (NASDAQ:COLB)

Q1 2008 Earnings Call

April 24, 2008 11:00 am ET

Executives

Melanie Dressel - President and CEO

Gary Schminkey - CFO

Mark Nelson - COO

Andy McDonald - Chief Credit Officer

Analysts

Matthew Clark - Keefe, Bruyette & Woods

Jeffrey Rulis - D. A. Davidson & Co

Aaron Deer - Sandler O'Neill & Partners L.P

Joe Morford - RBC Capital Markets

Sara Hasan - McAdams Wright Ragen

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking System's first quarter 2008 Earnings Call. (Operator Instructions). As a reminder this conference is being recorded.

I will now like to turn the call over to your host, Melanie Dressel, President and Chief Executive Officer of Columbia Banking System.

Melanie Dressel

Thank you, Felicia, and good morning everyone and welcome to Colombia’s conference call, and thank for joining us for the first quarter conference call on short notice. Although we don’t typically have a conference call each quarter, we've decided to commence quarterly conference calls for the foreseeable future because of the many questions we're receiving in the light of rapidly changing economic environment.

Joining me on the call today are Gary Schminkey, our Chief Financial Officer; Mark Nelson, Chief Operating Officer and Andy McDonald, Chief Credit Officer.

Before we begin, I would like to remind you that we will be making some forward-looking statements today, which are of course subject to economic and other factors, and for a full disclosure 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 SEC for the year 2007.

I am going to assume that you have all had a chance to read our first quarter press release and what we would like to accomplish with this conference call is just to provide more clarity to the information provided in the first quarter press release.

Gary Schminkey will discuss with you the following; our net interest margin during the first quarter, our core earnings, loan growth, capital liquidity and securities changes during the quarter. Andy McDonald will provide you with some additional color relating to loan mix, credit quality and the allowance for the loan losses. Mark Nelson will then speak with you about what we are seeing in terms of competition for loans and deposits. We will then open the discussion to questions.

To start our conversation I would like to discuss with you what we are seeing in the economy in the markets in which we do business. Of course nationwide economic indicators have been faltering in their concerns about slipping into a recession. Prices for everything particularly petroleum products and groceries are up except for housing where foreclosures are up and prices in most areas are down along with sales. However even though gas and grocery prices have increased in our region, we're still doing better than other parts of the country. And while the growth in the Seattle, Tacoma metropolitan area has slowed, we continue to exceed the national growth.

Recent statistics show more than twice the national rate of 0.7%. So, we're really feeling thankful that we’re headquartered here in Tacoma and operate in the Pacific Northwest with its relatively strong economy. The number of jobs in Washington State is still rising, although at a slower pace than in previous years. Last year Washington recorded a 1.7% growth in jobs over February of 2007. Following Microsoft and other tech companies are continuing to hire, Washington still has in migration as people move here for well paying jobs.

The Port of Tacoma is having another very good year. And generally speaking, Oregon is also doing well in employment growth with virtually all areas well above that of the United States in general. So, why is this area doing better than the country as a whole? [Buying] is of course the key part of our region's growth as the company continues to hire and as many vendors and subcontractors are expanding as well.

Washington is the most export focused state in the Union and not only did [buying]. Marples Pacific Northwest newsletter reported no state exports a higher share of output more than 2.5 times the national average and a lot of that goes directly through the Port of Tacoma. While we face many challenges in the coming months, we are hopeful that the fundamentals here will lessen the impact of a broader national economic slowdown.

One of the biggest wild cards in our estimation is the consumer. Recently the US Conference Board Consumer Confidence Index was published showing consumer confidence has dropped 11.9 points during March to 64.5. This was the slowest level since 2003 and well below its long-term average of 98.1. With consumer consumption being responsible for roughly 60% of the growth in the economy, we may be facing a more dramatic slowdown in the economy than what’s predicted at the end of last year and this would impact our area as well.

While there is no doubt that the economy in the nation and the Northwest is softening we still see strong growth opportunities in all of our Washington and Oregon markets. At Columbia we try very hard to build our company the right way. We are much less dependent than others on more volatile funding sources such as wholesale, certificates and deposits. Our strong retail system now includes 55 branches in 10 counties in Washington and Oregon. We rely on our core deposits, checking, savings and money market accounts which results from the strong relationship we have with our customers.

We have a diversified loan portfolio as well. In addition to commercial real estate lending and consumer lending we have a healthy 34% of our loans in commercial business loans, a higher percent than many of our peers. We are carefully monitoring our loan portfolio. We stay in frequent touch with the borrowers and take a proactive approach to any credit problems that may surface. Of course, our business is lending money and as always, we'll continue to make prudent loans taking into account the economic climate and collateral values. In the essence we will stay the course with our focus on good fundamental banking.

And now, I would like to turn the call over to Gary.

Gary Schminkey

Thanks Melanie. Yesterday we announced earnings for the first quarter 2008 of $11 million or $0.61 per diluted share compared to net income of $7.3 million or $0.45 per diluted share for the first quarter of 2007. Columbia certainly faces the same economic pressure and challenges as the rest of the banking industry. Our challenges remain centered on gathering low cost deposits, maintaining acceptable credit quality and preserving our net interest margin in light of declining interest rates.

I should mention that the results for the first quarter and for the year reflect the financial consolidation of Mountain Bank Holding Company and Town Center Bancorp which were both acquired on July 23, 2007. The first quarter 2007 financial information does not include the results of the two organizations. For comparisons of results between the two years usually requires a more in depth analysis.

You may have noticed that we included a section in the press release for core earnings. To arrive at the core earnings number we deducted gains on securities sales as we repositioned a small portion of our investment portfolio. We also deducted the gains derived from the recent Visa initial public offerings and the related reversal of settled Visa litigation expense which had been accrued in the fourth quarter of 2007.

Removing these items produced an operating or core earnings numbers for the quarter of $8.6 million or $0.48 per diluted share as compared to $7.3 million or $0.45 per diluted share last year at this time.

I would like to begin my discussion with the most visible operating reasons for the increase in core net income quarter-to-quarter, net interest margin. Declining short-term interest rates have impacted out net interest margins. Core net interest margin for the first quarter was 4.30% as compared to 4.37% one year ago. Core net interest margin is calculated by normalizing our government agencies preferred dividends adjusting the dividend for the actual number of days of ownership.

Despite the 300 basis point decline in short-term rates in September of 2007 including 200 basis points in the first quarter of 2008, our core net interest margin is up one basis points from 4.29% for the fourth quarter of 2007. As you may recall over 40% of our loans are prior to the prime related or other short-term indices. The reduction in interest income was more than offset by re-pricing our less rate sensitive core deposits as well as taking advantage of funding opportunities as we saw a disruption in the wholesale bond market.

Average asset yields have decreased to 6.89% or 27 basis points quarter-over-quarter. Average interest-bearing liabilities has decreased to 3.11% or 42 basis points quarter-over-quarter. We expect the pressure on our earnings to continue as competition for low cost deposits remains intense.

We made the decision to sell our interest rate floors in January of 2008. If you remember, in March of 2006, we purchased interest rate floors with a $200 million notional amount with strike rates flattered in at prime rates of 7.75 to 7.25%. We paid roughly 3.1 million for the floors in 2006. In January 2008, we sold the floors for $8.1 million producing a gain of $6.2 million.

The gain will be amortized over the remaining amortization period of the hedge with $1.7 million of the gain amortized in 2008, $2.6 million in 2009, and $1.7 million in 2010.

Our loans ended the quarter at $2.3 billion which was an increase of 0.8% or $17.7 million from December 31, 2007. Of the almost $18 million of loan growth approximately 14 million of the growth came from residential construction and $18 million was related to commercial business loans. The increases in these portfolio of sectors were tempered by declines in commercial mortgages and commercial constructions loans. We continue to report a well-diversified loan portfolio.

Return on average equity for the first quarter of this year was 12.6% compared to 11.52% for the first quarter of 2007. Our core return on average equity was 9.82%. Removing the effect for our acquisitions core tangible return on equity was 14.28% for first quarter 2008 as compared to 13.38% for the same period in 2007.

Our efficiency ratio was 62.36% for the first quarter compared to 63.39% during the same period last year. The efficiency ratio was very much affected by revenue growth as well as expense growth. The investment in the future growth of Columbia has powered the efficiency ratio decline, as has the effect of declining short-term interest rates.

We can't control the interest rate environment so our best opportunity to improve our efficiency ratio is through expense control. We are not happy with an efficiency ratio above 60% and we work to continue toward achieving a ratio of in the mid 50s while balancing our growth opportunity.

Non-interest expense grew by $3.2 million for the first quarter of 2008 over the same period last year. Compensation cost accounted for roughly $2 million of that total. While it is difficult to compare period-to-period due to the 2007 acquisitions as the percentage of growth revenue, core non-interest expense was up slightly at 43.9% of growth revenue as compared to 43.1% in the first quarter of 2007.

FDIC insurance assessments represented over 11% of the increase in other expense. We continue to closely monitor and control expenses, and we'll undertake many initiatives in 2008 to reduce overall expense growth while maintaining our commitment to customer service and our overall strategic plans.

Our federal income tax expense was 26.1% for the first quarter, about the same as last year. The tax rate is influenced by tax credits, municipal security earnings and various PRA programs. Going forward, we expect the tax rate to be between 27% to 28% of the pre-tax income.

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

Andy McDonald

Thanks Gary. As Melanie and Gary mentioned earlier, the economic conditions in the Pacific Northwest and I will take that as nation as a whole, but we have not been immune to the effects, which have impacted the national economy. Certainly the issues impacting the capital markets and the resulting contraction in credit availability has made this a much more difficult climate in which to operate.

In addition, the housing market in the Pacific Northwest has certainly weaken since the second quarter of 2007 as demonstrated by the S&P/Case-Shiller Housing Price Index, which shows that the [pre-designed] housing market peaked in the late summer of 2007. This data would indicate that housing values have declined 5.5% since July of 2007. Certainly, the impact of the decline in the housing market can been in many of our Pacific Northwest competitors and let me assure you we are not pleased to see these results nor do we believe that Columbia Bank will be immune to the same challenges they are facing today.

As a result, the company made a loan loss provision of $2.1 million of the first quarter of 2008 compared to $1.4 million in the fourth quarter of 2007 and $638,000 in the first quarter of 2007. This increase in the provision is a reflection of the challenges that current environment presents and we do not anticipate these challenges to subside in the near future. However, today we have not seen an elevated rise in pass-through loans or non-performing assets related to the wholesale housing segment of loan portfolio.

Non-performing loans increased slightly from $14 million at year end 2007 to $44 million at March 31, 2008. The majority of non-performing assets are centered in four credits most of which I had discussed previously in prior conference calls. Our largest non-performing asset is associated with a lot development loan in Pierce County. This accounts for 32% of our non-performing assets at March 31 and the balance is essentially unchanged since fiscal year end 2007.

I am pleased to report though that the borrower has now several pre-sales and has just recently obtained financing from another lender for the construction of the homes associated with these pre-sales. Furthermore, the additional collateral we obtained is part of the workout plan is now listed on the market and given that this is waterfront property on Lake Washington we expect it will sell relatively quickly.

So, we are making slow but positive progress on this one. Our second largest non-performing assets, which account for 16% of our non-performing assets is related to a condominium project located in Southwest Washington. At this time we are in the process of foreclosure and it is likely this asset will move into the OREO category during the third quarter of 2008. We do have a recent appraisal though that indicates we have a loan to value of 82%. So we are not anticipating any loss at this time.

Our third largest non-performing asset which is roughly 14% of this total is a commercial client which has been negatively impacted by the decline in the floor sale housing market. This client has now obtained financing from another lender and we are already in the process of transitioning this account to the new lender.

The last non-performing asset I would like to talk about is an income producing property along the Oregon Coast. This asset accounts for 10% of our non-performing assets or roughly $1.5 million. During the first quarter we reduced our balance on this relationship by $400,000 by charging it against our cap reserve. As many of you know, the State of Oregon has a capital access program which when a loan is originated, the borrower pays an upfront fee, which goes into reserve fund. The state of Oregon then matches the amount of the deposits which goes into the reserve fund as well. Essentially, this helps build a reserve for future loan losses and provides the funding mechanism.

Approximately 45% of the building is now leased and we have taken in assignment of the rents. The borrowers agreed to sign a judgment for the full amount of the note and that judgment has now been recorded and we are in the process of foreclosing on our adjustment. Based on our current valuation, we have an 85% loan-to-value after the charge to the cap reserve. The rest of our non-performing assets are comprised of various small loans spread across the entire loan portfolio.

In addition to adding to our reserves, we have also added additional resources to our credit administration and special credits department. We are fortunate to have a very experienced special credits department staffed by bankers with an average of over 12 years in workout. Having this team of experienced professionals allow us to manage our troubled assets, while not distracting our focus on customer service for the balance of the loan portfolio handled by our experienced relationship officers in this field.

Before I turn the call over to Mark Nelson I know many of you would like some additional information concerning our construction portfolio. I will start with our one-to-four family residential portfolio. This portfolio increased modestly in the first quarter as we continue to fund construction loans under preexisting commitments. In addition as we work with some of our more challenged builders, we have taken additional collateral to mitigate the risk profile or have converted certain loans back to lot loans as their plans have changed.

When we convert these loans back to lot loans, we require the borrower to pay the loans down by putting additional cash equity into the deal and the commitment to fund vertical construction is terminated. We believe this is prudent as it reflects the market reality and allows us to reduce our risk profile. As of March 31, about 48% of the one-to-four family residential construction portfolio is in vertical construction compared to 49% at year end.

Lots have declined 16% to 14%. If you combine the vertical and lots, you'll note an overall decline from 65% to 62% of the one-to-four residential construction portfolio indicating that despite the conversion of some vertical loans back to lot loans we have seen churn in the portfolio and sales of single family homes has picked up as we enter in to the spring market. Acquisition and development loans are up slightly from 25% of the portfolio to 27 and this reflects additional construction activity on the projects we were financing in December of 2007.

Finally, land which accounts for the balance of the portfolio is up modestly from 10% to 11%. From a loan to value perspective, our average loan to value across these segments is as follows. Vertical construction is 75%, lots are 66%, acquisition and development is around 65% and land is 63%.

We manage this portfolio very closely with monthly reviews for the majority of our builders and we are constantly evaluating the markets in which we have exposure. Our experience team of credit administration professionals were closely with the line and our focus continues to be managing the exposure we have in not expanding our number of builder banking relationship.

Our commercial construction portfolio is divided into three segments; multifamily, owner occupied and income producing properties. Multifamily includes our condominium exposure, which is down modestly from 22% at yearend to 20% as of March 31st, 2008.

Owner occupied construction is the area we have seen growth increasing from 23% of the portfolio at yearend to 31% as of March 31st, 2008. Finally, income producing properties which would include retail developments, warehouses and distribution represent about 18% of the portfolio as of March 31st, 2008.

And now, I will turn the call over to Mark Nelson.

Mark Nelson

Thanks Andy. We are pleased with the positive trend in our deposit growth despite tough competition for low cost deposits. While historically, we experienced a seasonable reduction in business related balances during first quarter, our period end core deposits have regenerated quickly, increasing nearly $11 million since yearend 2007. We attribute this success to both our retail and commercial focus on building relationships and on incentives for deposit generation. As has been our history, we continue to benefit from our strategy to strengthen and deepen our relationships with our customers, bringing in lower cost core deposits and making it easier to manage our net interest margin.

We also benefit from having balanced in a loan portfolio at which C&I lending remains a major focus in our principal lending activity. For example, in addition to the C&I portfolio, which now represents 34% of our total loans, another 16% of our loan portfolio is for permanent owner-occupied properties related to those same business clients.

In addition, we are benefiting from our past strategy of hiring experienced commercial bankers with solid C&I lending skills and don't now have to retrain or hire new lenders.

Finally, gaining efficiencies throughout the organization continues to be a priority. During the first quarter 2008, we identified two additional initiatives that will benefit non-interest expense as the year progress, including our recently announced consolidations of duplicate branches in Federal Way and Auburn and the integration of Bank of Astoria as a [DVA].

And now, I would like to turn the call back over to Melanie Dressel.

Melanie Dressel

Thanks Mark. To sum up our discussion this morning, we believe we are in a best position to ride up economic storm in spite the challenges. Our diversified loan portfolio and strong core deposit base are basic to our strategy. We are well capitalized and have multiple sources of liquidity. We have talented, experienced bankers committed to enhancing and strengthening customer relationship with excellent and measurable service and the right product.

We remain committed to decision making that will benefit our customers, our employees and our shareholders. All of us here at Columbia, look forward to our 15th anniversary this summer and we believe we are well positioned for success in the coming year.

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

And now operator, will you please open the call for questions.

Question and Answer Session

Operator

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

Matthew Clark - Keefe, Bruyette & Woods

Good morning.

Melanie Dressel

Hi, Matthew.

Matthew Clark - Keefe, Bruyette & Woods

Can you update us on the medical [niche] lending team that you guys acquired earlier this year in terms of I guess, updates on how they are doing in terms of portfolio size and whether or not there has been any additions?

Mark Nelson

Well, yeah, actually they've been doing very well. We had a budget developed for them which also was the basis for their incentive plan going forward. And I'm happy to report through the first quarter, they are substantial ahead of where we anticipated that they would be. They continue to bring in a lot of great relationships and also deposits related to those relationships. So, I would say they have been way more successful than we originally alluded to.

Matthew Clark - Keefe, Bruyette & Woods

Okay, and the team is the same size, I would assume --

Mark Nelson

Yes.

Matthew Clark - Keefe, Bruyette & Woods

Okay. And then in terms of the floor gain from the floors in the quarter, I know that it's going to persist for the next few years, which is great. But just -- and I'm not 100% sure if that 1.7 million that you anticipate, coming into interest income is evenly distributed throughout the year or not. So, I was just curious as to how much came in the first quarter here.

Gary Schminkey

About -- hey Matt. this is Gary,

Matthew Clark - Keefe, Bruyette & Woods

Hi, Gary.

Gary Schminkey

It's about 180,000 in the first quarter and it's not even throughout the year. I can provide that possibly may be next quarter with that hope, if you had it by quarter?

Matthew Clark - Keefe, Bruyette & Woods

Not necessarily. I can follow-up with you offline.

Mark Nelson

Okay.

Matthew Clark - Keefe, Bruyette & Woods

Thanks. And then, in terms of the margin, obviously a big surprise and I'm assuming some of that related to the mix of commercial deposits that you guys have, can you just touch -- give us a sense for where some of those sweet deposits may be, being priced and how the retention looks there?

Melanie Dressel

I'll comment first, Matt, and then let Mark jump in here. We have just really been managing our deposit pricing very -- we meet every week and review what the competition is doing and we're very sensitive to not being in a position of losing deposits and I am just very pleased with what the pricing committee has been able to do. Mark, would you like to fill in some more detail?

Mark Nelson

Well, I mentioned in the earlier discussion that we do tend to see a seasonal movement of business deposits out, a lot of that comes in our suite product. We've been able to move that down with the market to [below twos] is about where we are paying that deposit product today. Those numbers are coming back, we continue to grow a lot of commercial deposits around our remote deposit capture product. That's been very successful and I would say that's really a core of our business strategy from any of our clients.

Matthew Clark - Keefe, Bruyette & Woods

Okay, great. Thank you.

Operator

Your next question comes from the line of Jeff Rulis

Jeffrey Rulis - D. A. Davidson & Co

Good morning.

Melanie Dressel

Good morning, Jeff.

Gary Schminkey

Hey, Jeff.

Jeffrey Rulis - D. A. Davidson & Co

Hi. There has been benefit to margin, was that at FHLB?

Gary Schminkey

No, that was Fannie Mae and Freddie Mac.

Jeffrey Rulis - D. A. Davidson & Co

Okay, okay. So you've got a big -- the frequency of that benefit, is that foreseeable?

Gary Schminkey

Yeah, it's a constant interest rate as far as the dividend is concerned. What happened in the first quarter is we purchased the security just before the ex-dividend payment settled and we received the full benefit even though we didn't hold the security for the full quarter. In the following quarters, we'll have an average balance of the security outstanding for the full quarter and the associated dividend.

Jeffrey Rulis - D. A. Davidson & Co

Okay, thanks. And do you have monthly averages for the margin, for the quarter by month?

Gary Schminkey

It's something that we can provide. I don't have them in front of me right now.

Jeffrey Rulis - D. A. Davidson & Co

Okay. [I guess on the monthly] follow-up later. And then just one other thing on the overall real estate segment, looks like it's been declining. Since you closed the Mountain Bank and Town Center deals, are you sort of allowing some run off there or is it indicative of those markets are -- if you could just may be talk about the decline in that segment and overall production?

Andy McDonald

The Mountain Bank and Town Center bank did have a larger percentage of their portfolio in the floor sale housing segments. So, since we are not looking to expand that segment that has impacted those portfolios. However, since yearend and I can't remember going back prior to that, their loan portfolio is a bit relatively stable, so they have been able to offset the decline in growth and one-to-four sale housing with other loan types. We did have a number of our commercial construction loans convert to permanent loans and in some cases those went to other lenders predominantly life companies.

Jeffrey Rulis - D. A. Davidson & Co

Thanks.

Operator

Your next question comes from the line of Aaron Deer.

Aaron Deer - Sandler O'Neill & Partners L.P

Hi, good morning guys.

Melanie Dressel

Hi, Aaron.

Gary Schminkey

Hey Aaron.

Aaron Deer - Sandler O'Neill & Partners L.P

Gary, a question, you've mentioned in your comments regarding the funding. Obviously, your deposit cost, you guys have done a great job keeping those down and then you also mentioned being able to take advantage some dislocation with respect to the funding, can you give some more details on that?

Gary Schminkey

Yes. During the first quarter, there were some opportunities, both on the FHLB at Seattle and [two regional] markets that provided some very low cost funding, if we were able to lock in for a certain period of time. Those funds are putable and they are putable back to us but the theory is that with our portion of commercial and industrial loans that are tied to prime or some other type of index, when those rates start to move up and if those deposits do get put back to us although the funds do get put back, that's not a bad thing.

Aaron Deer - Sandler O'Neill & Partners L.P

Okay, and that's a -- I guess it was about 25 million in the retail funding?

Gary Schminkey

Right.

Aaron Deer - Sandler O'Neill & Partners L.P

And what was -- what kind of rate then do you have on that?

Gary Schminkey

I think that was 1.88% and that is locked in for a year.

Aaron Deer - Sandler O'Neill & Partners L.P

Okay. And Andy on the -- can you may be give some more color in terms of what you are seeing in terms of credit trends, classifieds, criticize and what you might expect given what you are seeing now in terms of loan losses for the full year?

Andy McDonald

Well, we generally don't disclose all of the risk categories they have and we certainly don't give forward guidance on losses for the year. But clearly, my comments are meant to indicate that we are seeing credit challenges ahead and that the environment is weakening and certainly, I am much more concerned today I think, as I see what's happening to all of my neighbors and what that impact may have on the market in general.

Melanie Dressel

Andy, you might talk about your concern for lenders falling away from the market (inaudible). (17;1:59)

Andy McDonald

Yeah. I mean a lot of these, for example, a lot of the production builders have credit relationships with a number of financial institutions. And in some cases, we are just one financial institution providing credit to these individuals. While, we each finance different projects, it doesn't mean that if one lender becomes extremely concerned because of issues that are happening within their own shop is that they don't -- they end up causing trouble for the builder and that domino effect then happens to all of the other lenders that are supplying credit to that builder, because it could cause a liquidity. And certainly, when I see the numbers my friends and neighbors that has tightened my concern on what I call the domino effect.

Aaron Deer - Sandler O'Neill & Partners L.P

Okay. That's helpful. I appreciate your comments. Thank you.

Melanie Dressel

I think that it is important for everybody to understand that we've been very fortunate to have our loan portfolio perform fairly well and we are not covering as well. What we are seeing is that we are being realistic about what we see going on out there in the market and that has cost us to just be even more diligent in the management of our portfolio. And Andy and his team of credit administrators and such credit officer are just doing a very, very good job of managing the credit. That being said, we can't control the economic environment, we recognize that and we are just very cautious.

Aaron Deer - Sandler O'Neill & Partners L.P

Okay. Thank you.

Operator

(Operator Instruction). Your next question comes from the line of Joe Morford.

Joe Morford - RBC Capital Markets

Thanks. Good morning everyone.

Melanie Dressel

Good morning, Joe.

Gary Schminkey

Hi, Joe.

Joe Morford - RBC Capital Markets

Actually, most of my questions have been asked already, may be just a couple of follow-ups. Gary, just kind of all in with your comments, it sounds like you are kind of looking for the margins to hold relatively stable in here with perhaps some modest pressure, is that fair to say?

Gary Schminkey

I would say there has been some modest pressure. I am noticing a little more competition now or rates starting to trend up on the CDs in our market and I would imagine that the core deposits aren't far behind.

Joe Morford - RBC Capital Markets

And as -- on the CD stuff, is that coming from other banks or more from the non-banks mortgage type companies or?

Gary Schminkey

It's coming from both, Joe. I am noticing more advertisements coming from local bank but in addition to those that are coming -- that has been around for non-banks.

Joe Morford - RBC Capital Markets

All right, okay. And then, it seems like perhaps the other income line was up a little more this quarter. Was there anything of usual in that at all or it's just overall for fees expect for the fees that pretty good level to build off of?

Gary Schminkey

Yeah, I think -- I don't think there is anything unusual in that other income line other than to say that I believe we have swap fee or two in there and a pre-payment penalty probably for the first quarter.

Joe Morford - RBC Capital Markets

Right, Okay. Great, thank you so much.

Gary Schminkey

Good luck, Joe.

Melanie Dressel

Thank you, Joe.

Operator

Your next question comes from the line of Jeff Rulis.

Jeffrey Rulis - D. A. Davidson & Co

Hey, just have to follow-up. I didn't know if you could comment on customers. There has been quite a bit of rumors about the Barclays North developers. I didn't know if you have any exposure there or if you can comment?

Gary Schminkey

We have no exposure there.

Jeffrey Rulis - D. A. Davidson & Co

Okay, great. Thanks.

Operator

(Operator Instruction). We have a question from the line of Sara Hasan.

Sara Hasan - McAdams Wright Ragen

Hi Guys.

Melanie Dressel

Hi, Sara.

Gary Schminkey

Hi there.

Sara Hasan - McAdams Wright Ragen

Kind of an odd question, but I'm just wondering, are you guys still looking at other acquisition possibilities. I think you are one of the few banks that have some flexibility out there.

Melanie Dressel

We are always talking with other banks that we feel will be good partners with us. We always look at -- first of all, it's got to make financial sense for us, it needs to extend our geographic footprint and the culture has to be compatible and we've added a fourth factor to that and that would be, would any kind of an acquisition be a distraction to us because of credit issues and those kind of things. So the answer is, we'll continue to develop relationships and we will see where that goes.

Sara Hasan - McAdams Wright Ragen

Thank you.

Operator

And at this time, there are no further questions.

Melanie Dressel

Well, once again I just want to remind everybody that we are going to start having quarterly conference calls and I just don't want anybody to be concerned since we normally do not have conference calls each quarter. And we will be issuing that give you earnings schedule earlier for a subsequent quarters. And thank you once again for joining us. We really appreciate your interest.

Operator

Ladies and gentlemen, this does conclude today's conference call. At this time, you may disconnect.

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Source: Columbia Banking System Inc. Q1 2008 Earnings Call Transcript
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