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Edited Transcript of PCBK earnings conference call or presentation 19-Jan-05 9:30pm GMT

Q4 2004 Pacific Continental Corporation Earnings Conference Call

Eugene Nov 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Pacific Continental Corp earnings conference call or presentation Wednesday, January 19, 2005 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mick Reynolds

Pacific Continental Corporation - EVP & CFO

* Hal Brown

Pacific Continental Corporation - President & CEO

* Roger Busse

Pacific Continental Corporation - EVP & Chief Credit Officer

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Conference Call Participants

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* Louis Feldman

Hoefer & Arnett - Analyst

* Ross Haberman

Haberman Funds - Analyst

* Jonathan Ash

- Analyst

* Jeff Rulis

DA Davidson & Co. - Analyst

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Presentation

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Operator [1]

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Good afternoon and welcome to the fourth quarter Webcast conference call for January 19, 2005. Your host for today will be Hal Brown. Mr. Brown, please go ahead.

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Mick Reynolds, Pacific Continental Corporation - EVP & CFO [2]

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Good afternoon. This is Mick Reynolds, Executive Vice President and Chief Financial Officer of Pacific Continental Corporation. Welcome to Pacific Continental Corporation's conference call and Webcast to discuss our fourth-quarter and full-year results for 2004. Hal Brown, President and Chief Executive Officer of Pacific Continental, Roger Busse, Executive Vice President and Chief Credit Officer, and I will be presenting to you today.

We will update you on our recent activities and discuss the financial results reported in the press release distributed earlier today, January 19, 2005. At the conclusion of our prepared remarks, we will provide analysts and institutional investors with a question and answer opportunity where we will address any questions and provide additional background information where appropriate. Today's press release is available on the investor relations section of our Web site at www.therightbank.com.

Before we commence the formal remarks, we advise you that this Webcast contains forward-looking statements. Statements made are factual as of the initial time of this Webcast. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. Pacific Continental Corporation undertakes no obligation to publicly revise or update the forward-looking statements to reflect events or circumstances that arise after the date of the Company's fourth-quarter and full-year 2004 earnings release referenced in this Webcast and the date of this Webcast. Participants and listeners should carefully review any risk factors described in the Company's periodic reports on Forms 10-K, 10-Q, 8-K, and any other documents filed or furnished from time to time with the Securities and Exchange Commission. This statement is included for the express purpose of invoking the Safe Harbor provision. 3 Now let me introduce and turn the call over to Hal Brown, President and Chief Executive Officer of Pacific Continental Corporation.

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Hal Brown, Pacific Continental Corporation - President & CEO [3]

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Thank you, Mick. Good afternoon and thank you to our conference call and Webcast participants for joining us today. In addition to Mick Reynolds, our CFO, I've asked Roger Busse to once again join us to provide you with more insight into our credit and loan administration.

The year 2004 was a success for Pacific Continental as we built upon the momentum of 2003. We continued to achieve strong growth in assets and loans, and for the first time, total assets exceeded $500 million. In the mode of continuous improvement, we further strengthened our credit practices and credit training, resulting in additional progress in the overall credit statistics of our loan portfolio. Our reported net incomes for the fourth quarter and full year were each record results for our bank, and for shareholders, the success of our strategies enabled us to declare our second consecutive stock split and increase our cash dividend by 15.6 percent. Those are a few of the highlights, but certainly not all that we accomplished.

Before we go into the details of the full year, let's take a quick look at the results for the fourth quarter. Let me remind you that all outstanding shares and per-share data for the prior year have been retroactively adjusted to reflect the 5-for-4 stock split paid during the third quarter of 2004.

The bottom line for the fourth quarter was net income of 2.2 million, up 23.6 percent from the 1.8 million reported for Q4 2003. Earnings per diluted share for Q4 were 25 cents, compared to 21 cents for the prior year. Operating revenues came in at $8 million for the fourth quarter, up 16.3 percent over the prior year. Net interest income for the quarter was up 19.7 percent, while the noninterest income component of operating revenues was level with the prior year.

In a bit of a surprise and reflecting the strong efforts of our bankers, loan growth in the fourth quarter was stronger than we forecasted to you in our third-quarter Webcast. At December 31, gross loans grew 29.2 million from September 30, with our bankers closing almost half of that growth in the last two weeks of the year. We grew core deposits as expected, increasing $18 million for the quarter. The growth in loans is a very positive development and will contribute to net interest income and operating revenues in the first quarter 2005.

I will now briefly recap 2004 full-year results. As I mentioned, net income was a record $7.9 million for 2004, a strong 16.4 percent increase over the 6.8 million reported for 2003. Return on assets was 1.71 percent and return on average equity was 17.26 percent, a typical profile for PCBK and very similar to the 1.70 percent and 17.18 percent achieved in 2003. Diluted earnings per share were 90 cents this year compared to 79 cents for 2003, a 13.9 percent increase.

Asset growth is the primary driver behind our revenue improvement and earnings success. During the second quarter of 2003 we reported for the first time total assets of over $400 million. Today we reported assets of 516.7 million, up 21.3 percent over assets of a year ago and up 15.2 percent when comparing annual averages. Continued quality lending activity is important for the sustained success of our company. And as I mentioned earlier, we were successful during the fourth quarter in generating stronger-than-expected loan activity. At year-end, total loans were 459.1 million, up 103 million, or 28.9 percent from that of a year ago.

Core deposit growth is also very important to PCBK as it allows us to fund our loan activity while maintaining a strong net interest margin. Our average core deposits were up 19 percent from last yea's average, actually exceeding the 16.1 percent in average loans. And for the 12-month period, core deposits grew $51.1 million. While it is ideal to have a closer relationship between loan growth, 103 million, and core deposit growth, 51 million, management is not uncomfortable with this difference as we have access to many funding sources other than core deposits.

The Bank continues to benefit from noninterest-bearing checking account balances, and it's worth noting again that at December 31, 2004, these valuable deposits represented 32.8 percent of total deposits and funded 25.6 percent of total assets. Later I will speak to our deposit gathering activities, but now I'll ask Mick to discuss the Bank's net interest margin.

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Mick Reynolds, Pacific Continental Corporation - EVP & CFO [4]

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Thank you, Hal. As we have noted in the past, Pacific Continental continues its long history of achieving strong net interest margins. From a balance sheet perspective, our bank benefits both from strong loan demand and low-cost funding sources. PCBK's interest margin as a percent of earning assets was 5.78 percent for the full year, down from the 6.01 percent for the full year 2003.

During 2004 the Federal Reserve moved to increase short-term interest rates and the record low interest rate environment of the last few years finally reversed. Although the Bank is asset-sensitive, the initial increases in the market interest rates during the third quarter 2004 had little positive impact on the Bank's net interest margin, as much of the Bank's variable-rate loan portfolio had active floors above the calculated rate. With the fourth-quarter increase in the prime lending rate, virtually all of the Bank's prime-based loans are above established floors and are again fully floating.

The fourth quarter was the strongest margin of any quarter during the year at 5.87 percent. That compares favorably to the third, second and first-quarter net interest margins of 5.74, 5.74 and 5.78 percent, respectively.

Contributing to our net interest margin is our strong loan demand. At December 31, 2004, our loan-to-asset ratio was 88.9 percent, allowing us to benefit from loan yields as opposed to lower-yielding securities. Pacific Continental's outlook with respect to net its interest margin for the first quarter 2005 is stable to slightly lower than the fourth quarter 2004, and the outlook for the full year 2005 is for a net interest margin in the range of 5.80 percent to 6 percent.

Looking forward to the first quarter, it's worth noting that the Bank traditionally experiences a flat to negative growth in core deposits while loan activity remains strong. This has the effect of potentially decreasing our first-quarter margins as the decline in core deposits typically occurs in the lower-cost demand deposits and commercial money market accounts. While the net interest margin may actually decrease, we expect net interest income to grow because of the offsetting increases in asset volume.

The Bank has ample funding sources to meet its liquidity needs, including term borrowings, Fed fund lines, public deposits and national time deposits. And we actively manage those resources to achieve the best cost of funds. In some previous years, the Bank has sold loans to meet temporary liquidity needs. While we do not anticipate that this will be necessary in 2005, we do have approximately 25 million in marketable guaranteed SBA loans and roughly 20 million in commercial real estate loans packaged and available for our participation with interested commercial banks, if necessary.

I would now like to provide some more details on our noninterest income and noninterest expense. For the year 2004, noninterest income was 4.5 million compared to 4.9 million in 2003. 2004 results were negatively impacted by three factors -- a significant slowdown in the refinancing of residential mortgages due to higher residential mortgage rates, a decline in account service charges, and a decline on the gains on sales of commercial real estate loans.

Residential mortgage revenues declined 488,000, or 32.8 percent, from last year's 1.5 million. However, we have seen a consistent improvement in revenues from mortgage originations as the year progressed and long-term rates stabilized. In fact, residential mortgage revenues in the fourth quarter 2004 were equal to revenues reported for the fourth quarter last year.

In addition to the decline in mortgage revenues, account service charges dropped by 100,000 from last year. This decline was the result of the increase in short-term market interest rates, which increased the earnings credit on analyzed business demand deposit accounts and reduced hard dollar fees.

Lastly, in 2004 the Bank took no gains from the sale of commercial real estate loans that contributed 130,000 in onetime revenue during 2003. The reduction in income in these areas was partially offset by a strong increase in our merchant bank card revenues, as our merchant program showed a $220,000, or 24.3 percent, increase over last year.

Noninterest expenses in the year 2004 were $16 million, up 839,000, or 5.5 percent, over last year. Comparing 2004 to 2003, the largest increase is in personnel expense, which grew by 1.1 million, or 12.5 percent over last year, reflecting personnel costs for bankers added during late 2003 and during the first half of 2004, primarily related to our Portland expansion, and increased group insurance costs. Salaries increased 10.2 percent over last year and accounted for 582,000 of the increase in personnel costs, while group insurance costs increased 41.1 percent and accounted for 251,000 of the increased personnel costs.

During the year the Bank introduced a new branding campaign, and the production costs associated with this campaign, combined with the planned increase in our Portland market advertising expenditures, resulted in an increase of 195,000 in advertising expense for the year. The growth in these expense categories was offset by a decline in onetime expenses associated with the 2003 opening of our KOIN Center office in Portland and a decline in our other real estate expense. Other real estate expense declined by approximately 525,000 (technical difficulty)

2003 included expenses related to write-downs and operating losses associated with motel and hotel properties which were sold during early 2003. In addition to these increases in expenses, the Bank spent approximately $91,000 in 2004, mostly for in the fourth quarter, related to compliance with Section 404 of Sarbanes-Oxley, for software and professional services.

For the year 2005, we expect a slightly higher rate of growth in noninterest expenses in anticipation of increased staffing and marketing expenses associated with the opening of our fourth metropolitan Portland office.

Now, let me introduce Roger Busse, our Chief Credit Officer, who will discuss our loan portfolio, including concentrations, risk mitigation and policy practices.

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Roger Busse, Pacific Continental Corporation - EVP & Chief Credit Officer [5]

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Thank you, Mick. The Bank's primary credit performance statistics at year-end continued a positive migration in all categories, including non-performing assets as a percentage of total assets, 0.27 percent, net loan charge-offs of 0.08 percent, and past due loans of 0.26 percent.

Credit quality in our specific portfolios as of year-end, particularly medical professionals and residential construction, remains strong. For example, in our residential construction portfolio, there were no loans rated with watch or worse ratings, and no loans were past due more than 30 days. Quality of our unused formal commitments was also very strong, with over 99.5 percent rated as pass.

Despite this showing, during the fourth quarter, we made a specific provision of $182,000 for unused formal commitments. Provisioning for loan commitments is a growing industry trend that provides a more accurate and conservative approach to the potential unfunded commitment risk. Independent third-party examinations during '04, which revealed over 56 percent and reviewed over 56 percent of our total outstanding major markets, found PCB's risk rating process to be both accurate and timely. There was not a single major examiner-originated rating downgrade during the year. These same examinations have rated the credit quality of our newly-originated credits in both markets as very good.

Overall, the effectiveness of our fundamental credit practices -- including uniform cash flow analysis, underwriting strategies, lending authorities, granular risk ratings, and assertive and thoughtful problem loan management, with regular watch loan meetings -- have all supported these results.

The strengthening evidenced in the portfolio as of year-end and the confirmed quality of the new loan growth per independent assessment all really underscore our policies and practices are on solid ground. Given this, it is opportune for me today to provide a more direct discussion and additional insight into PCB loan portfolio and practices, particularly as it pertains to any future potential risk.

Thus for today's presentation, I will first provide a more detailed and focused profile of the PCB loan portfolio. Secondhand, along with the drive for market growth, we have embedded key risk management practices. And in that regard I will briefly describe two of those practices. Finally, rate and price sensitivity require that the best performing community banks keep their eye on horizon. Again, in that regard, PCBK has an established early warning mentality in its credit culture and practices which I will describe, including our commercial real estate sensitivity segmentation analysis. Clearly, these three topics provide insight into both the risk tolerance tenor of the bank and the key practices that match that tenor. Overwriting each area is our continued demand for quality first, then profitability, and finally, growth.

So let's begin with a more focused and detailed profile of the loan portfolio. Now, similar to many community-based banks that are focused on business relationships, PCBK's loans are primarily commercial real estate, what we refer to as CRE, and commercial and industrial loans, or C&I loans.

For example, of the 459.1 million in loans at year-end, real estate-secured loans comprise 339.3 million, or 73.9 percent, and C&I loans were 105.1 million, or 22.8 percent. Based on this general break out, the real estate portfolio might appear somewhat high. However, true commercial real estate -- namely, permanent loans to finance investor or non-investor acquisition of commercial real estate holdings -- represents only about 42 percent of the total loan portfolio. Further, we segment our commercial real estate loans into five major groups with no less than 58 categories.

For example, we identify and analyze owner and non-owner-occupied offices, professional offices, warehouses, industrial property, anchored detail, and our hotel and apartment portfolios in great detail. Because of this work we understand the diversity, pre-pricing horizons (ph), occupancy rates, net operating income trends and collateral structures, as well as our largest clients within each market. Of course we also stress test and sensitize the commercial real estate portfolio for interest rate movements and vacancy rate changes. We do this to determine both our portfolio tip-over points, and also of course individual outliers. With regard to the new commercial real estate loans, we require similar stress testing as part of the underwriting presentation.

Now, residential construction and development, constituting about 16 percent of total loans, is separately analyzed with (indiscernible) residential construction being only about 3.9 percent of that total loan portfolio. All new projects are tracked on a semi-monthly basis with advances well-controlled using internal guidance lines and limitations on spec construction. As has been noted, there are no watch or worst-rated credits in this portfolio at year-end. The remaining CRE loans are secured and represent miscellaneous mix categories and new construction financing.

The commercial and industrial portfolio is also well diversified with another 25 segments, and the average loan size remains about $350,000. A large segment of these loans are a result of our active Small Business Administration loan program and are thus SBA-guaranteed. Business loans to professionals, primarily lawyers, dentists and physicians, when combined, constitute a growing segment and represent about 9 percent of outstanding loans. Many of these loans are also SBA-guaranteed. In fact, more than 23 percent of the C&I portfolio has SBA guarantees.

As one might expect, working capital loans and lines form the largest segment, or about 37 percent of the C&I portfolio, the majority of which are monitored lines with typical qualifying parameters, recourse guarantees, advance rates, and of course, certificate requirements.

Along with the drive then for growth comes the need for quality underwriting and consistency in pricing in order to maintain margins. Two credit practices which strengthened in '04 should be noticed.

First, regardless of their formal prior training, we required all lenders and all loan assistants to attend extensive internal credit training and cash flow analysis, underwriting structure, risk rating and sensitivity analysis. We consider this a best practice and to do this periodically. Also, we developed and implemented a new pricing model to assist in the validation of rate spreads to help maintain margins in a competitive environment. The model is currently used by our credit administration staff on all larger credits to evaluate ROA and ROE and ensure that strong benchmarks are met.

This concludes my comments for today. And with that, I'll turn it back to Mick.

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Mick Reynolds, Pacific Continental Corporation - EVP & CFO [6]

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Thank you, Roger. I will now share with you some of the specifics relating to our allowance for loan losses and provide you additional detail regarding our non-performing loans and assets.

As you have heard, our strong credit practices and the work of our lenders and the credit administration team has led to an overall improvement in the credit quality statistics for 2004 that allowed the Bank to reduce the provision for loan losses when compared to the previous year. The provision for loan losses in 2004 was 500,000 compared to 900,000 in 2003.

At year-end our allowance for loan losses as a percent of total loans was 1.14 percent, but as a percentage of non-performing loans was 468 percent, a coverage of nearly 4.7 times. That compares to an allowance to loans of 1.47 percent and a non-performing loans coverage of 287 percent at December 31, 2003. The reduction in the 2004 provision was accomplished despite the significant growth in our total loan portfolio.

Going forward, our provision for loan losses in subsequent quarters is much more contingent upon the growth in our loan portfolio than the improvement in the portfolio statistics. This is not a forewarning of increased problem credits, but rather a realization that there is only limited additional lift available from further improvement in the portfolio credit statistics. As a result, we expect the provision for loan losses in the first quarter 2005 to be in the range of 200 to 300,000.

Total non-performing assets net of government guarantees were 1.4 million at December 31, 2004, a decline of 850,000 from December 31, 2003. Non-performing assets at year-end include 1.1 million in nonaccrual loans and loans 90 days or more past due, net of government guarantees, and 262,000 in other real estate owned. Other real estate owned consists of a single commercial property located in Lane County.

At December 31, 2004, approximately 2.9 million of loans were classified as impaired and a specific allowance of 510,000 included in the ending allowance at year-end was assigned to these loans. That compares to impaired loans of 3.2 million at December 31, 2003, and a specific allowance of 628,000. The impaired loans at December 31, 2004 include one restructured and performing loan of 1.9 million. The 1.9 million restructured and performing loan is a hotel in the Portland area, and the Bank currently anticipates that during the first quarter of 2005, and based on present cash flows, that this loan will be fully amortized in a current market interest rate and will no longer be classified as restructured or impaired.

For the year 2004, the Bank had net loan losses of 319,000 compared to 268,000 for the year 2003. The ratio of net loan losses to average outstanding loans was 0.08 percent for both 2004 and 2003.

That completes my prepared remarks and I will now turn it back over to Hal.

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Hal Brown, Pacific Continental Corporation - President & CEO [7]

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Thank you, Mick. Earlier this month, we announced our intent to purchase a Portland property for our fourth metropolitan office and 11th office overall. Although we are still in the process of clearing contingencies and won't close on the property until later in the quarter, it provides many opportunities to discuss some of our growth plans and our organizational structure that is designed to meet our market objectives.

During 2004, we organized our company personnel into two separate markets and named very experienced bankers to manage those markets. Mitch Hagstrom leads our larger Eugene/Springfield market as Director of Lane County Operations, while Daniel Hempy was named as Director of Portland Operations. Both of these individuals have years of banking experience and are each very familiar with the characteristics of the markets they lead.

This organization moved responsibility for both deposits and loans closer to the market and customer, with increased accountability for growth objectives and ultimate success. I am pleased with the results of the organization and expect the changes to lead to further growth and success during 2005.

At year-end, Portland activity represented 53 percent of gross loans and Lane County was 47 percent of total loans, while Portland core deposits represented 18 percent and Lane County was 72 percent of total core deposits. I don't believe this imbalance is unusual as banks enter new markets, but Portland deposit growth is a high priority for 2005.

We believe low-cost core deposit growth is dependent upon our developing additional office locations. As we expand our Metropolitan Portland footprint, we remain committed to our business segment focus of serving community-based businesses, professionals and not-for-profit businesses. And that's why I'm very pleased with the location described in our earlier press release.

The area's demographics match our focus very well, with many community businesses, medical and other professionals within a tight radius of the new location. We hope to open the office in the third quarter and have high expectations for deposit growth. Our analysis indicates that this office will be profitable when deposits approach $15 million, and we anticipate reaching this level of deposits in 12 to 15 months from opening.

There's little question that our future success, both for the new location and the Bank as a whole, is dependent on our having the best professional bankers. When you have many competitors, and frankly, offer what amounts to commodity products, you must find a way to differentiate, and for us it's our people, culture and service. Our clients and prospects are surprised and always complimentary of our service and the attention they receive. Our employees retain accountability at every touch-point, and that is the difference that allows us to proclaim PCBK as the right bank for business. We will continue with this formula that has served the Bank and our clients very well, and we look to build on this differentiation in the future.

This completes our prepared remarks. We will be happy to open the call now for any questions. We're ready to open the Q&A session now.

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Questions and Answers

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Operator [1]

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(OPERATOR INSTRUCTIONS). Louis Feldman.

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Louis Feldman, Hoefer & Arnett - Analyst [2]

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In terms of the comment that much of the loan growth -- half the loan growth for the quarter came in the last two weeks of the year, can you touch on what your pipeline looks like at this point in time? Was there any sort of push, and has that kind of emptied that going into the first quarter, or are you going to just simply be able to back up the truck and reload fairly quickly in your opinion?

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Roger Busse, Pacific Continental Corporation - EVP & Chief Credit Officer [3]

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This is Roger. I will address that to begin with. The portfolio and placements that took place towards the end of the year represents the completion of a lot of pipeline loads that were already in the works. There was no additional push that cleaned out the pipeline for the beginning of this quarter, and the pipeline still remains strong in both markets.

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Louis Feldman, Hoefer & Arnett - Analyst [4]

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And that pipeline would --?

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Roger Busse, Pacific Continental Corporation - EVP & Chief Credit Officer [5]

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Well, generally about $81 million.

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Louis Feldman, Hoefer & Arnett - Analyst [6]

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Roger, another question for you. Over the year there was a fairly significant decline in the allowance on the percentage to total loans as you reduced your provisioning, and it certainly did not keep pace with the loan growth. Is there any intention to work on building that back up, or are you going to keep -- I guess what I'm looking at -- are you going to keep provision as a percentage of total loans about where it is now, or are we going to look for that to increase when you have opportune times?

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Roger Busse, Pacific Continental Corporation - EVP & Chief Credit Officer [7]

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Our methodology for provisioning is that we look at specific loans, particularly large loans, and we allocate based on not only risk ratings but loss in the event of default. So we allocate on specific loan basis. So we feel very comfortable with our loan loss provisioning. As Mick mentioned earlier in his presentation -- he can address this in addition to my comments -- our plan is to contribute between 200 and $300,000 during the first quarter, so we will see some build in the reserve depending on growth. I would also say that we did fund our unused formal commitments at the end of the year and that will continue, which should continue to strengthen or build the reserve on an accurate basis.

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Mick Reynolds, Pacific Continental Corporation - EVP & CFO [8]

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That's correct, Lou. There's $182,000 that had previously been in our ending allowances throughout the year that was moved to other liabilities as a reserve for our outstanding and unfunded loan commitments. And I want to reiterate, because this question kind of came up, I believe, last quarter, that we do not peg a certain percentage for our allowance to our outstanding loans. So we are not attempting to target a percentage. We look at all of the factors as Roger described -- signing specific reserves to larger loans, and risk ratings, and our classified loans. So many factors go into it, but there's certainly no percentage that we strive to achieve during the year.

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Louis Feldman, Hoefer & Arnett - Analyst [9]

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I have got a couple of more, but I will step back at this point.

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Operator [10]

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Ross Haberman.

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Ross Haberman, Haberman Funds - Analyst [11]

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Could you discuss what steps you're taking on the deposit side to sort of help grow that a little quicker than you have to help fund your what sounds like pretty good loan growth, and continuing to be so?

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Hal Brown, Pacific Continental Corporation - President & CEO [12]

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Well, we have pretty successful core deposit growth for the year. It was up $51 million, which I think was in the neighborhood of 19 percent, which we are very pleased with. We are also quite pleased, of course, with the loan growth that we got. So we will fund any difference that comes from that from -- as Mick said, we've got alternative funding sources other than core deposits to look at.

But as we go forward it is important that we try and grow our core deposits, and primarily in the Portland market. That's one of the reasons we look to add the fourth metropolitan office. We put -- reorganized the Bank so that the market directors are responsible for both deposits and loans, and success for their incentive bonuses are going to be tied to gathering both deposits and loans. So, comfortable with the deposit growth, would certainly like to have some more, but we won't slow the loan growth down if deposits don't keep up with it.

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Ross Haberman, Haberman Funds - Analyst [13]

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Specifically what other sources are you currently using for deposits or home loan advances, or what is currently the most advantageous source today?

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Mick Reynolds, Pacific Continental Corporation - EVP & CFO [14]

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Primarily in the last two weeks when we experienced the significant loan growth, we used overnight fund sources -- funding sources, with lines -- we have overnight lines of $57 million with various correspondent banks. We have a line of 129 million with the Federal Home Loan Bank. So we have plenty of funding available from those two sources.

As we moved into the year, we converted some of those to long-term FHLB advances, and also used public deposits to reduce the level of the overnight borrowings. At present we are accepting what we call our money debt (ph) deposits, or national time deposits, as those rates are now comparing very favorably to home loan advanced rates at various maturities. So at the present time we are using all -- most of our sources for funding at this point.

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Hal Brown, Pacific Continental Corporation - President & CEO [15]

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I want to make something a little clearer that Mick might have said. He said since the end of the -- he didn't actually say this -- but he inferred since the end of the year perhaps that we had converted some Fed funds borrowings into Home Loan Bank advances and public money. He was referring to 2003. We have not done that since the end of 2004.

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Ross Haberman, Haberman Funds - Analyst [16]

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One final question. About the new branch, could you give us a reasonable expectation on, say, within two years or so, how big could that branch be in terms of deposits? What is a realistic expectation within, say, two years or so?

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Hal Brown, Pacific Continental Corporation - President & CEO [17]

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Well, we hope within 12 to 15 months that we attract $15 million or so in core deposits. That area has some other bank locations which have significant deposits in them in the 50 to $75 million per branch. So we would expect in a two, three-year timeframe to be approaching 25, $30 million, and then grow it from that point.

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Operator [18]

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Jonathan Ash.

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Jonathan Ash, - Analyst [19]

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I had a question. I actually have two questions. The first one would be, during the third quarter on the last call you mentioned you hired between 6 to 8 professionals -- several of whom were lenders, and I believe two of them were from WaMu -- in Lane County. And the first question would be have those people brought on any loans as of this point?

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Hal Brown, Pacific Continental Corporation - President & CEO [20]

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Just to make it accurate, we hired one commercial lender from the Western Mutual situation. He is working in our Lane County office. He has had success in bringing some relationships over. His pipeline is significant and we're hoping to continue to work on his pipeline and bring those in. The others are primarily in the Portland area, and they have also been successful in bringing loans to market as well.

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Jonathan Ash, - Analyst [21]

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The second question is regarding the capital. The future looks very bright and the growth rates, obviously, have been very good as well. I guess -- do you really need this much capital? Why not increase the dividend or buy back stock, especially with the outlook looking so good?

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Mick Reynolds, Pacific Continental Corporation - EVP & CFO [22]

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This is Mick Reynolds. At year-end, we had -- we are committed to maintaining a well-capitalized ratio with the FDIC, which means that are risk-based capital must be at least 10 percent of our risk-based assets. At year-end that ratio was 11.27 percent and we had approximately $6 million of capital in excess of the risk -- the well-capitalized rating. At year-end 2003 that ratio was -- that number was 8.6 million. So we used up 2.6 million of the excess capital with the growth that we saw during 2004. We anticipate that we will continue to use that capital at that rate for the next couple of years. So we anticipate that excess capital will continue to come down. We do not expect, and I do not expect, that we will have a stock buyback. The Board will be reviewing our dividend recommendation for the year in the first quarter, and I would anticipate that would be going up from the previous year.

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Operator [23]

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Jeff Rulis.

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Jeff Rulis, DA Davidson & Co. - Analyst [24]

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Regarding this related to the rising loan to deposit ratio -- in terms of deposit pricing, would you become more aggressive on pricing to gain more deposits? Or I guess in more general terms, what is the pricing environment that you're seeing, either in Portland or in Eugene?

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Mick Reynolds, Pacific Continental Corporation - EVP & CFO [25]

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This is Mick Reynolds again. Our philosophy is that we do not compete on rate. We understand that rates need to be competitive, but you will not see us advertising CD rates in the newspaper. We don't offer special programs, deposit programs. Our business is, and our growth and our deposits comes from our ability to develop relationships and provide a high level of service. Our rates always remain competitive with other banks, but we never attempt to, for example, match or beat all of our competitors' rates. And we certainly are very well versed in I think we call it relationship pricing. When we have the opportunity to get a large relationship, whether it be deposit, loan and deposit, we certainly will price very competitively.

The other thing from our -- with our money desk or our access to the national CD market, we really don't want to cannibalize and start pricing in local markets higher than is necessary when we have access to the national CD market where we can get deposits at a slightly higher rate, but certainly not having to push up the cost of our entire core deposit base.

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Roger Busse, Pacific Continental Corporation - EVP & Chief Credit Officer [26]

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I would also mention -- this is Roger -- that as part of our lending strategy, we do incorporate in all of our lending analysis, because we are a relationship bank, a relationship strategy, which entails strategies on how to increase core deposits or relationships with our clients as we grow our loans. And that is an integral part of the analysis and discussion at committees.

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Mick Reynolds, Pacific Continental Corporation - EVP & CFO [27]

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And I'm going to further add that we -- like our loan pipeline, we have a deposit pipeline report where we are constantly monitoring the contacts we make on the deposit side. We feel like we have had some very good opportunities in the first quarter to attract some new relationships that's going to add significantly to our core deposit base.

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Jeff Rulis, DA Davidson & Co. - Analyst [28]

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Good enough. One unrelated follow-up. Is it possible to get a breakout of the distribution of your loan production among your top three or top five lenders? Any sort of color on that would be helpful.

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Hal Brown, Pacific Continental Corporation - President & CEO [29]

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We have never provided that kind of data. We work as teams, and as one -- excuse me. As a lender becomes very successful and builds their portfolio, we move those loans out of that person's responsibility into others'. So it's really not relevant to talk about individual totals by person.

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Operator [30]

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(OPERATOR INSTRUCTIONS). Louis Feldman.

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Louis Feldman, Hoefer & Arnett - Analyst [31]

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Mick, can you comment on the FHLB impact from the dividend, and any anticipation there?

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Mick Reynolds, Pacific Continental Corporation - EVP & CFO [32]

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Yes. I haven't -- I actually haven't seen what the dividend is going to be.

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Louis Feldman, Hoefer & Arnett - Analyst [33]

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No one has.

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Mick Reynolds, Pacific Continental Corporation - EVP & CFO [34]

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We have approximately $2.7 million in Federal Home Loan Bank stock. That had been averaging, Lou, approximately 20 to $23,000 per quarter. So in total that number is less than $100,000 for the year. And while I have been in contact with various people at the Federal Home Loan Bank, and I do understand that the dividend for the fourth quarter that's going to be paid in the first quarter is going to be somewhat less than that, it is certainly not going to have any significant impact on our earnings for the first quarter of 2005 nor for the year 2005.

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Operator [35]

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Thank you. There are no more questions from the phone lines.

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Hal Brown, Pacific Continental Corporation - President & CEO [36]

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Thank you. I'm Hal Brown and I thank you for your interest in Pacific Continental and for your time today.

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Operator [37]

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Thank you, ladies and gentlemen. This concludes today's conference call.