Heritage Financial Corporation (HFWA) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you very much for standing by. Welcome to today's Heritage Financial announces fourth quarter and full-year earnings release. [Operator Instructions] As a reminder today's conference is being recorded. And I would now like to turn the conference over to the President and CEO, Mr. Brian Vance. Please go ahead, sir.

Thanks, Dave. Good morning to all who have called in and those that may listen in later. Attending with me this morning is Don Hinson, our CFO. Our press release went out this morning before market opened and hopefully all of you've had an opportunity to review the release prior to this call. As in all press releases, I'm going to read a short forward-looking statement for the record. Statements concerning future performance, developments, or events; expectations for growth and market forecast; and other guidance on future periods constitute forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that might cause actual results to differ materially from stated expectations. Specific factors include, but are not limited to, the effective interest rate changes; risk associated with the acquisition of other banks and opening new branches; the ability to control costs and expenses; credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs; changes in general economic conditions, either nationally or in our market area. These factors could affect the company's financial results. You should not place undue reliance on forward-looking statements and we undertake no obligation to update any such statements. The company does not undertake or specifically disclaim any obligation to revise any potential forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. Additional information on these and other factors are included in the company's filings with the Security and Exchange Commission. I'll start off the call this morning by just a few highlights of our fourth quarter. Diluted earnings per share -- per common share increased to $0.14 for the quarter ended December 30 and from $0.12 in the prior quarter ended September 30, 2011. We increased our quarterly cash dividend to $0.06 per share. During the quarter, we repurchased 132,000 shares of common stock and we originated loans -- our originated loans increased $35 million or 4.4% during the quarter ended December 31, and increased $95.9 million or 12.9% during the year ended 12/31/2011. Non-interest demand deposits at 12/31/2011 increased to 20.4% of total deposits compared to 18.9% at September 30, 2011 and 17.1% at December 31, 2010. Just a couple of comments about earnings. We posted Q4 earnings of $2.23 million or $0.14 per share, which was an increase from Q3 2011 net income of $1.84 million or $0.12 per share. We posted 2011 net income of $6.52 million or $0.42 per share. Our total loan loss provision for 2011 was $14.4 million, which was comprised of $5.2 million for originated loans and $9.2 million for purchased loans, which all compared to a 2011 provision of $12 million which was all originated. Net charge-offs on originated loans for 2011 were $4.9 million compared to $16.1 million in 2010. Our originated loan loss allowance to total originated loans decreased slightly to 2.66% at 12/31/2011 from 2.79% at September 30, 2011. Overall, I believe this was a solid earnings quarter with nice improvements in some areas of expense control. I'll turn the meeting over now to Don Hinson, who'll take a few minutes to cover balance sheet, income statements, as well as a few comments about acquisition accounting. Don?

Thanks Brian. First, I'll discuss the balance sheet. Total assets remained basically unchanged at $1.37 billion from quarter-to-quarter. Focal date total originated loans increased approximately $35 million during the quarter as a result of increased loan production. This is the fourth consecutive quarter of originated loan growth. Total originated loans increased $96 million or 13% for the year. Total deposits decreased $1.4 million during Q4 and decreased $232,000 from the prior year-end. Quarter-over-quarter non-maturity deposits, which are total deposits less LCDs, increased $17.7 million while certificate of deposit accounts decreased $19.1 million. Of this decrease, $6.2 million was related to certificate of deposit accounts assumed in the Cowlitz Bank and Pierce Commercial Bank acquisitions, including $645,000 of Internet [ph] CDs which were re-priced at the time of acquisition and continue to run off. There are approximately $4.1 million of acquired Internet CDs remaining. Our non-maturity deposit ratio continues to improve and is now very strong at 71% of total deposits. In addition, the percentage of non-interest demand deposits to total deposits has increased to 20.4%, up from 19 -- 18.9% at the end of Q3 and 17.1% at the end of 2010. The continued improvement in our deposit mix has resulted in lowering our cost of deposits to 47 basis points for Q4 2011, down from 57 basis points in Q3 2011 and 71 basis points from Q4 2010. Total equity decreased $3.6 million during Q4. The ratio of tangible common equity to tangible assets decreased to 13.9% at December 31 from 14.1% at September 30. The decrease in these ratios was driven by a combination of cash dividends in the amount of $4.7 million and stock buybacks in the amount of $1.6 million. Our book value per common share decreased to $13.10 at December 31, 2011 from $13.23 at September 30, 2011 and increased from $12.99 million at December 31, 2010. Our tangible book value per common share decreased to $12.16 at December 31 from $12.29 at September 30 and increased from $12.03 at December 31, 2010. This decrease from quarter-to-quarter was due to the special dividend paid in the fourth quarter of 2011. Moving on to the acquired loans. During the quarter we recorded a provision for loan losses on the purchased loans in the amount of $3.1 million. These provisions were due substantially to the decrease in estimated cash flows and certain pools of acquired loans from the original cash flow estimations. The change in FDIC indemnification asset was a positive $327,000 in Q4 2011 compared to a negative $1.7 million in Q3 2011. As a reminder, the FDIC indemnification asset relates to covered loans obtained in the Cowlitz acquisition. Cash flows on acquired loan portfolios continue to be re-estimated on a quarterly basis. Moving on to net interest margin, our net interest margin for Q4 was 5.18%. This is 29 basis points decrease from 5.47% in Q3 2011 and a 21 basis point decrease from 5.39% in Q4 2010. The effect on the net interest margin of incremental discount accretion over senior note [ph] rates on the acquired loan portfolios for Q4 was approximately 43 basis points. This compares to 72 basis points in the prior quarter ended September 30 and 88 basis points for Q4 2010. Without the effects of the incremental discount accretion, net interest margin remained unchanged at 4.75% from the prior quarter and loan yields decreased approximately 6 basis points from the prior quarter. Interest reversals on non-accrual originated loans impacting the net interest margin for Q4 were approximately 9 basis points compared to 11 basis points for Q3 and 12 basis points for Q4 2010. Our focus on non-maturity deposit growth and pricing strategies continue to drive the cost of funds lower, which has also contributed to our strong net interest margin. And the cost of funds for Q4 was 58 basis points compared to 69 basis points for Q3 and 86 basis points for Q4 2010. Non-interest income was $2.9 million for Q4 0211 compared to $14.3 million for the prior year Q4 2010. The decrease from the prior year was substantially due to the effects of a gain on the Pierce Commercial acquisition that occurred in Q4 2010. Non-interest expense decreased $1 million to $12.8 million during the quarter ended December 31, 2011 compared to $13.8 million for the quarter ended December 31, 2010. The decrease for the quarter ended was due to the decreases in professional services, FDIC insurance expense, occupancy, and equipment expense, and data processing expense and partially offset by an increase in salaries and benefits expense. Non-interest expense increased $11.5 million to $52.1 million for the year ended December 31, 2011 compared to $40.6 million for the year ended December 31, 2010. The increase for the year was due to increases in the categories of salaries and benefits, occupancy and equipment, data processing, other real estate owned including valuation adjustments, and increased state and local taxes. These increases were substantially due to the Cowlitz and Pierce Acquisitions, which occurred during the last half of 2010, but fully affected expenses in 2011. Non-interest expense control continued to be a focus of ours. However, continuing growth related expenses and other expenses such as loan resolution costs as well as shrinking net interest margins will make it likely that we will see a higher than historical efficiency ratio for the near-term. For Q4 2011, our efficiency ratio was 66.1% compared to 68.3% for Q3 2011. Brian will now have an update on overall loan quality changes and loan growth as well as some closing comments.

Thanks Don. First of all, I'll deal with some loan growth. As reported earlier, for the fourth consecutive quarter, our originated loan portfolios increased and we also once again achieved an overall net loan increase. We believe this is significant evidence that our organic growth initiatives are working. Most all of our lenders, legacy, acquired, and hired lenders are booking new relationships as well as continuing to grow their existing relationships. During Q4, we booked a total of $79 million in loans. These loans represented -- represents new loans to new borrowers and new loans to existing borrowers. As we reported earlier, originated loans increased $35 million. Many things influence net loan balances such as new loans, loan payments, repayments, advances, and pay-down on existing lines of credit, and of course reductions in acquired portfolios. We analyzed all new loans over $300,000, which represented a total of $57.6 million, and these loans break down as follows; 16 C&I loans totaling $10.3 million, 9 owner-occupied CRE loans totaling $8.3 million, 14 non-owner-occupied CRE loans totaling $32.8 million. Our non-owner-occupied CRE growth is substantially larger than we would normally see, however this $32.8 million breaks down as follows. $11.8 million were 7 different multi-family new relationships, one loan of $11 million was to a long-term C&I client which occupies just less than 50% of this building so therefore classified as a non-owner-occupied CRE loan, and a $4.1 million non-owner-occupied CRE loan was to an existing C&I client. There were also 3 construction loans totaling $4.7 million and all of these were commercial construction loans and there were 2 single family loans totaling $1.5 million. Average loan size for the new production was $1.3 million per loan. Average yield for these new -- for all of these new loans were 5.21%. Some comments about loan quality. Our total originated potential problem loans decreased 23.8% to $29.7 million from $39 million in the previous quarter. Our restructured originated performing loans increased to $13.8 million from $7.2 million in the previous quarter. The increase in restructured originated performing loans was primarily due to a $4.3 million commercial loan, which was not previously classified as a potential problem loan at September 30, 2011 as well as a $2.6 million commercial loan, which was disclosed as a potential problem loan at September 30. The $4.3 million loan is a built mix used retail office building in Pierce County. They are still only at 50% occupancy. Our guarantors have strong income and they have been able and willing to personally subsidize the difference the monthly loan payment and the income for the past 4 years. However, this has been taxed in the absolute rate relief in order to lower the loan payment while they continue leasing the vacant space. They modified the rate from 7.4% to 4%. This loan is about 100% loan to stabilize value and we believe this modification will allow the project to lease up and stabilize in value. The $2.6 million loan is a retail strip mall also in Pierce County. While cash flow is weak, our collateral value based on current appraisal covers our loan balance well. We decided to bifurcate the loan into a conforming A loan and a non-performing B loan. The property is being marketed for sale and when the property sells, we should be able to recover the balances on both loans. Non-performing originated loans decreased $2.4 million from prior quarter. Our coverage ratio remained strong at 103.5% at the end of the quarter, which is up from 94.7% for Q3 2011. And our allowance to total originated loans at quarter end was likewise a strong 2.66%. As stated previously, our coverage ratio has been consistently well over 80% and will likely remain so. I'd like to share with you some more asset quality metrics and while quarter-to-quarter loan quality improvement metrics were muted, I think it's important to take a look at year-over-year results. All of the data I'm about to give you is for the originated portfolio only. For 2010, our net charge-offs were $16.1 million. Our net charge-offs for 2011 were $4.9 million. Our non-performing loans percentages at the end of last year was 3.14% for 2010, but that improved at the end of 2011 to 2.57%. Our coverage ratio, as just mentioned earlier, improved from 95% at the end of 2010 to 104% at the end of 2011. Our total classified originated loans at the end of 2010 was $83 million. Our total classified originated loans at the end of 2011 was $67 million or otherwise down 19.4%. And after substantial overall credit quality improvement year-over-year, our total allowance went up about $250,000 and now stands at a very solid 2.66%. Couple of comments on OREO. At quarter end, our OREO balance was up $1.9 million from Q3 balance of $2.6 million. During the quarter, we added $2.6 million of assets and disposed of $391,000. We are actively working through these assets to final resolution. I'd like to share with you some key performance highlights for 2011. Our charge-offs for the legacy portfolio are at the lowest quarterly levels since 2005. I have consistently given guidance that due to our growth initiatives, our efficiency ratio is likely to remain higher than our historical norm and is also likely to increase from current levels due to revenue reduction as a result of contracting net interest margins. For the third consecutive quarter, our efficiency ratio has improved slightly and now stands at 66.1%. As mentioned earlier, our loan quality improved substantially during the year and our loan loss allowance actually in dollars -- in total dollars actually grew evidencing what I believe is a strong overall loan loss allowance. Organic growth in 2011, we added several new lenders during the year and I continue to be pleased with our loan growth. This has been a major focus of ours over the past year or so and I'm satisfied to see evidence that our loan growth strategy is posting positive results. We added a new branch in Gig Harbor, Washington early in the year, which is a community close to Tacoma. We also acquired a branch in Kent, Washington during the year. And we hired a market executive for Southwest Washington, who is located in Vancouver, to grow our presence in that key market and to take advantage of market dislocation that is occurring there. Organizational focus, we were successful in integrating our 2 acquisitions in late 2010 by training employees, fine-tuning efficiencies, and focusing on growing our smaller branches. For example, where we inherited smaller branches we were able to grow deposits a combined 19.5% in 2011. Noteworthy growth has been our Bellevue office grew total deposits 48%, our Longview office grew total deposits 21%, and our Vancouver office grew total deposits 16%. We will continue to focus on growing our acquired smaller branches to improve profitability and efficiencies. Our acquired assets continue to exhibit overall performance results that meet our original expectations. I believe that loan loss provisions and FDIC indemnification asset amortizations for these acquired pools will abate soon and will provide some meaningful improvement to our EPS as we move into and through 2012. Capital management, we are well aware that we have a strong capital position and we remain positive that we'll be able to leverage our capital into new growth opportunities. Due to the lack of success in bank acquisitions in 2011, we realized we need to focus on alternative capital management strategies. To this end, during 2011, we initiated our regular cash dividends in Q2. We increased our regular cash dividends in Q3 and for Q4. We paid a special dividend of $0.25 in Q4 which brought our total dividend yield for 2011 to 3% assuming year-end stock price close of $12.56. We realize different investors have different price points of entry, so individual dividend yields may vary. We initiated a 5% stock back in Q3 and were successful in purchasing shares in both Q3 and Q4. Obviously, our current price has moved up and beyond our current tangible book value, but we will continue to evaluate opportunities to continue our buyback activity. I'd like to make a few comments about general outlook for 2012. Our overall view of 2012 is as follows. As many of you know, I have had a relatively unfavorable outlook on our national and Pacific Northwest economy for the last several years, but I am cautiously optimistic that we may see some slight improvements in the latter half of this year. Some data that gives me a measure of encouragement that we may begin to see improvement in the Pacific Northwest economy is as follows. Local unemployment rates have shown improvement and we have recent improvement rates nationally. Kidder Mathews, one of the largest and most respected commercial real estate firms based in Seattle, has provided us the following commercial real estate information as of the end of year. This data is for the greater Seattle MSA. Apartment vacancies are currently at 5%, down from a cycle high of 6.9% in 2009. Hotel occupancy rates improved to 65.5%, up from 63.3% in 2010. Retail markets vacancy rates are currently at 6.11%, down from a cycle high of 6.51% in 2010. Our industrial market vacancy rates are currently at 7.5%, down from a cycle high of 8.3% in 2010. Our office market vacancy rates are currently at 12.4%, down from a cycle high of 14.2% in 2009. While I'm encouraged that all of these CRE metrics are showing improvement, there are still substantial improvement opportunities ahead. On a less positive note, we still have some headwinds to deal with. The Case-Shiller Home Price info that was just released shows Seattle at 1.2% decline in prices for November over October, which was slightly better than the 20-city composite decline of 1.3%. On the other hand, Portland's same number declined 1.6%. We must see single family residential value stabilize before we can see true improvement in the Pacific Northwest economy. Most of you are aware of the Federal Open Market Committee's recent announcement to lengthen the low rate environment through 2014, which will continue to reduce net interest margins. Net interest margin compression will increase efficiency ratio and of course, reduce revenue for most all banks. Our strategies for 2012 are to continue to focus on quality organic loan growth. We may see muted growth in the first half of the year due to lower pipeline numbers from Q4, but if the Pacific Northwest economy begins to grow, we are hopeful that we will see stronger growth in the last half of this year. Continue to improve overall credit quality and credit costs and I believe we will. Continue to focus on leveraging our capital through ongoing capital management strategies, organic growth and acquisitions, both FDIC and Open Bank. As I have said on several occasion, FDIC-assisted transactions will be fewer and fewer, but there will be some and we will be active when there are. Open Bank deals would be on our terms. We will not do an acquisition that does not make sense strategically or financially. We have had several opportunities to close a transaction, but we could not arrive at terms that we thought were compelling to our shareholders. The number of troubled banks remains compelling, but the simple fact remains they do not yet have a catalyst or sufficient motivation that convinces them that they should sell at a discount to book. And unfortunately deal metrics, loan marks, and purchase accounting issues prevent us from paying a premium to book. I do believe that will one day change. To close my prepared my remarks, the pace of consolidation has surprised and frustrated me and most experts throughout the nation. While we continue to aggressively pursue acquisitions, we also remained focused on growing organically, improving our financial metrics, and returning a respectable yield to our investors though our capital management strategies. I continue to believe there will be attractive opportunities for the well-capitalized and well-positioned banks in 2012 and beyond. I would welcome any questions you may have and once again, refer to our forward-looking statements in our press release as I answer any of your questions in the following session. So Dave, if you'll open the call for questions, I'd be pleased to take any.

[Operator Instructions] We'll hear from the line of Jeff Rulis with D.A. Davidson.

Question on the loan loss provision for purchased loans, the $3.1 million. Don, I don't know if you can further break out what was for covered and non-covered purchase loans of that amount?

For the -- of the $3.1 million for purchased covered and non-covered, most of that was in the actually non-covered portion of that, probably 70% of that was non-covered.

Okay. So that would -- I guess we're kind of tracking that provision number versus the change in indemnification asset and given the bulk was non-covered, that's why the purchased. Well, I guess put another way, Brian, you kind of touched on the expectations for the purchased loan loss provision and you've got 2 buckets in there. But I guess as you've gained confidence with the portfolio, what are the expectations for that given what you saw in 2011?

As I said, I think that we continue to remain optimistic that provision for acquired portfolios will abate as we move through the year. I think that anytime that you acquire assets from troubled banks, you can expect some difficulties in working through those assets. I think further complicated by purchase accounting rules in terms of how you work the pooling processes. But I think as we -- and we worked through a couple of particularly troublesome loans in Q4, but I remain confident that as we work through this year, we are going to see those numbers fall off substantially.

And Don, did you say that the discount accretion impact to margin last quarter was 72 basis points?

Last quarter, yes, it was 72 basis points.

Okay, and so, on a core basis down a couple basis points sequentially. Do you have any more room to move funding costs lower, otherwise I look at you guys have put on phenomenal loan growth and saw a little slip in margins and with the comments about muted growth in the first half expectations, I guess that suggests margins are shrinking or is there more work to do on the funding cost side?

I would comment just real quickly on the funding cost, no, I don't think that we can do much more there. I think when you take a look at our overall funding costs, we've got a pretty attractive number there in relation to most of our peers and the other reason for that is our loan growth. I think we do need to look at growing deposits, we're roughly 89%, 90% of loan to deposit ratios and that's about the upper end of our comfort level. And so I think that as we have future loan growth, we'll match our deposit growth. And so I think that while our current margin has been -- though we've benefited from lowering deposit costs, you can see and we reported that we managed out a lot of CDs, but we increased transaction count. We probably got to slow down the out-migration of CDs, stabilize that, maybe even grow it a little bit, which suggests to me that we're probably not likely to improve overall funding costs. Don, you may have some comments as well?

Yes, I agree that we may see it come down a little bit, the cost of funds, but it will be very small going forward. And although we'll be able to keep our margin up pretty well overall due to the low rate environment, I think that any refinancing that's going to happen is going to be at lower rates and it's going to affect our margin going forward.

One last one, if I could. Just the service charge income has held pretty strong and actually grew, does that appear sustainable? And I guess on a broader question, some of the stuff you've acquired and the implementation of those fees there maybe, Brian, you could comment on the outlook for maybe that line item for the coming year now that you've rolled in those acquired branches?

Sure. When we -- our non-interest income as it pertains to checking account fees or transaction fees, I think is in direct correlation to our growth in our transaction accounts. That has been a focus and a strategy of ours for many, many years. I'll remind everybody that we ended the year at a 20% DDA, a non-interest bearing deposit total. I fully am aware that there are some moneys parked there to take advantage of unlimited FDIC insurance, I get that. But I think the important thing to remember is, is that we are a legacy savings bank and to be sitting here today at a 20% DDA number, I think is a very strong tribute to what our branch and lender teams have done out there in terms of growing transaction accounts. And when we do grow transaction accounts, you typically see -- you see some fee growth along with that. So the extent that we can continue to grow transaction accounts and that is our goal, I think that the fee structure will continue as it is and I think we may even see a little bit of growth as we go through the year. That's an important strategy of ours.

Next we will go to the line of Tim O'Brien with Sandler O'Neill. Tim O’Brien: Quick question. Do you guys have a weighted average price that you paid for those shares that you repurchased?

Yes. Tim, for the fourth quarter it was about $11.76. Tim O’Brien: And then Brian, for you, can you help me reconcile historic -- expectation for historically higher efficiency relative to what you've been putting up the past couple of quarters. It seems like you've been over delivering?

I am pleased with the efficiency ratio as it is. I'd signaled all year-long that it's going to be at 70% or above and every time I'd say that, it actually goes down. But I think that's a win and I appreciate your comments there, and that just didn't happen. We've managed those numbers hard. I think there's been some comments and questions about efficiencies of smaller branches and while those are all very real concerns and they're concerns of ours, we have certainly focused on growing those branches and I think I gave you evidence that we are doing that. But we're focusing efficiencies on everywhere in the company. I guess my pessimism, if you will, about can we hold that 66% is probably really aimed at our margin. When you take a look at efficiency ratios, there are 2 sides of it, expense and revenue. And we all know that net interest margin is a huge, huge part of the revenue equation. And when you -- I think it's inevitable because the FOMC's announcements that margins are going to continue to shrink. And when you apply those factors in, I think it's going to be hard for anybody to hold existing efficiency ratios. So while I love where we are and I wish that we could hold it and even improve it, the net interest margin is a wildcard that I'm unable to predict at this point. Tim O’Brien: Fair enough. Do you think that we can get or you'll get some tailwind this year potentially in lower workout cost, lower OREO cost? And what was your OREO cost of I guess maintaining that portfolio and managing it in the fourth quarter?

I'll let Don respond to the cost question. I guess just in terms of just an overall view of OREO. We've never really had a lot of OREO, but I think of it as we get resolution to some of the problem loans that, that number is, we're going flow stuff through there. But I think the important thing is, is that we are pretty aggressive when -- before it goes to OREO when marking it down. And of course, those marks show up in loan loss. In terms of the actual costs, I think we're going to have some probably fairly typical OREO costs in the first half of this year, typical in terms of what it was in 2010 and maybe we could reduce that as we start working through a couple of more problematic loans that are in process as we speak. So Don, any addition to that?

And Tim, are you talking about not necessarily valuation write-downs, just the cost of maintaining the OREO? Tim O’Brien: Yes, and also more broadly even just credit workout cost.

I think it probably fluctuates somewhere between $50,000 and $100,000 a quarter to kind of manage the properties and then on this last quarter, we had a little bit of a valuation adjustment also on top of that. Tim O’Brien: And then will you be deploying or redeploying folks from work out into more line production capacity this year, you think?

Interesting question. I don't think we're going to see any this year. When we look at our overall problem loans on a relative basis, I think we're in pretty good shape, but we want to get that stuff managed and out of here and so we're going to keep the heat on through most all of this year. Could we see some of those redeployed next year? Possibly, but I don't think that would happen this year. Tim O’Brien: And are the employee hours kind of engaged on a quarterly basis? Is -- the majority of that I guess is probably going towards your acquired book problem assets?

Majority, let me just think through that. Tim O’Brien: Working harder at that because...

Oh, absolutely. Yes, the acquired portfolios are substantially more problematic as one would expect, but I think we're making some pretty good headway on those portfolios. So yes, certainly the majority of the emphasis is on that -- on those 2 portfolios. Tim O’Brien: And then last question, there was a small uptick in salary and benefit, like $0.5 million or a little less, is that -- can you give some color on was that incentive comp tied to the nice loan volume and is that going to carry into next -- to the first quarter of the year or was that a true-up a year and what's the story behind that?

And Tim, you're talking from quarter-to-quarter? Tim O’Brien: Yes.

Yes, I think if you remember, last quarter we had actually dropped it some because we made kind of an adjustment to some incentive comp numbers, and so that went back up some this quarter. I think I mentioned that last quarter -- Tim O’Brien: That's right. And so, first quarter, will we see possibly some, I don't know, start of year higher accruals towards insurance workman's comp insurance or something like that, that will pass through that line item?

I would probably expect that that line item might get bigger in the first quarter, yes.

Next we will go to Jackie Chimera with KBW.

I had a question about the yield on loans, this might be -- and actually it's probably for both of you. As I'm looking at the linked quarter and this is x the discount accretion, I'm seeing the loan yield at 6.17% in the current quarter and the compression wasn't too bad from the 6.24%. But then, I know that in the last quarter when it compressed roughly 20 basis points, you had said that the loan growth was the driving factor behind that compression just looking at the lower yields. What occurred in the loan growth this quarter that didn't cause more loan yield compression?

Well, again, we booked quite a few loans this quarter and I think that was the driving factor of that.

Let me comment on that, Don, before I forget. I was looking at the notes from the last quarter and the year, we reported yield of the new loans that we booked in Q3 at 5.7% and I think I reported to you today that the new loans for Q4 was 5.2%. So, you can see that there is a difference in the yield, which is understandable given economic issues, which are related to interest rate and competitive issues, which a lot of folks chasing loan growth. So, go ahead, Don.

Right. I think that's part of it, Jackie, that we have been able to increase the loan so much that it has muted somewhat that from some other loans but -- and the margin, being able to keep the margin again pretty much unchanged once you take out the discount accretion I think is due to that combination of again lower cost of funds, but mostly due to the fact that we had some nice asset growth on the loan side.

Yes, I know. I was very impressed with the loan growth in the quarter. And so if I understood you correctly, Brian, from your prepared remarks, the C&I customers that are existing that had gone into the more investor CRE book, was any of that a reclassification out of refinance or was it new loans to customers that also have existing C&I loans?

Yes, they're all new loans, Jackie. Just to clarify that for instance, there was a $11 million non-owner-occupied CRE loan. The client, the borrower has been a long-term C&I borrower, we just did not have this loan on his facility. And the reason it didn't qualify as an owner-occupied is, is they occupy just less than 50% of the facility, they rent out the balance of it so then therefore it's classified non-owner-occupied. And then there was one other non-owner-occupied CRE loan for $4.1 million that was made to an existing C&I client.

Okay, so none of it is reclassification, it's all --

No, no, it's not.

Extending relationships with existing borrowers, okay.

These are new loans. They are not re-class is correct.

Okay and then just one final question for you, Don. As I know we've gone through the accounting offline quite a bit. The change in the cash flows on the pools, if I understand it correctly, it doesn't have to be -- to take the provision in the quarter. It doesn't mean that the net credit position has weakened, it just means that the certain loan position -- in certain pools the position has weakened. So what would you say the overall net credit position on a linked quarter basis was in those pools?

That's a good question. I think it did overall because the size of the provisioning I think it probably net there were some probably decline in overall cash flow estimation. But part of it was due to the fact that certain pools were -- maybe already had a provision. And therefore, if they declined some more, that goes straight to provisioning while there's other pools that may have improved, but they didn't have a provision in the first place and therefore we didn't get to recapture any provision on those. So I think that's part of it, but I think overall the cash flow estimations declined from quarter to quarter.

[Operator Instructions] All right, Mr. Vance, no further questions in queue. Please continue.

Well, I think that completes our presentation this morning. I appreciate all of you listening in. And I know there are some of you on the call that I'll be seeing at the various investor conference over the next few weeks, so look forward to seeing you there. Thanks to everybody for your interest and your ownership.

Thank you very much. And ladies and gentlemen, that concludes your conference today. We appreciate your participation and you're using the AT&T Executive TeleConference. And you may now disconnect.