Below is transcript of the Pacific Continental Corporation (NASDAQ:PCBK)’s Fourth Quarter 2014 Earnings Call, held on January 22, 2015, at 2:00 p.m. EST. Basswood Capital, Hutchin Hill Capital and Royce & Associates was among Pacific Continental Corporation (NASDAQ:PCBK) shareholders at the end of the third quarter.
Pacific Continental Corporation (NASDAQ:PCBK) is a bank holding company. The Company’s principal business activities are conducted through Pacific Continental Bank (the Bank), an Oregon state-chartered bank with deposits insured by the Federal Deposit Insurance Corporation (FDIC). The Bank has two subsidiaries, PCB Service Corporation (presently inactive), which formerly held and managed Bank property, and PCB Loan Services (presently inactive), which formerly managed certain other real estate owned.
Company Representatives:
Mick Reynolds – Executive Vice President & Chief Financial Officer
Roger Busse – President & Chief Executive Officer
Casey Hogan – Executive Vice President & Chief Operating Officer
Damon Rose – Senior Vice President & Chief Credit Officer.
Analysts:
Eric Grubelich – Highlander Capital Group
Tim Coffey – FIG Partners
Don Worthington – Raymond James
Jeff Rulis – DA Davidson
Tim O’Brien – Sandler O’Neill
Jackie Chimera – KBW.
Operator
Ladies and gentlemen, I would like to welcome you to today’s Pacific Continental Corporation’s Fourth Quarter 2014 Earnings Call. Before we get started, I would like to explain some of the ways that you can participate in today’s call. At the conclusion of today’s presentation, management will entertain your questions. At that time you may ask a question by pressing * 8 on your telephone keypad. We will remind you of this instructions at the beginning of the question and answer session. If you experience any technical difficulties with the audio for today’s conference, please press * 0 on your phone for assistance.
And now without any further delay, I would like to introduce your first presenter, Mick Reynolds, Executive Vice President and Chief Financial Officer. Mr. Reynolds, you now have the floor.
Mick Reynolds – Executive Vice President & Chief Financial Officer
Thank you, Christine, and welcome to Pacific Continental Corporation’s conference call and webcast to discuss our fourth quarter and year-end 2014 results. Presenting today will be Roger Busse, President and Chief Executive Officer; Casey Hogan, Executive Vice President and Chief Operating Officer; and me. We will update you on our recent activities and discuss the financial results reported in our press release distributed after the market close January 21, 2015. Our press release is available on the Investor Relations section of our website at www.therightbank.com.
Before we commence the formal remarks, we advise you that this webcast contains forward-looking statements, which may include information about future profitability, loan growth, problem asset resolution, changes in the net interest margin, and anticipated cost savings. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. We undertake no obligation to publicly revise or update any forward-looking statements to reflect events or circumstances that arise in the future.
You 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 with or furnished to the Securities and Exchange Commission. This statement is included for the expressed purpose of invoking the Safe Harbor Provisions for forward-looking statements under applicable law. Now let me introduce and turn the call over to Roger Busse, President and Chief Executive Officer of Pacific Continental Corporation.
Roger Busse – President & Chief Executive Officer
Thanks, Mick. Hello, welcome to today’s conference call and webcast discussing the results for our fourth quarter and also the year-end 2014. I will begin today’s conference call by briefly discussing fourth quarter year-end highlights of the core bank and then reflect on our strategic direction. At the conclusion, I will provide an update on the status of our previously announced acquisition of Capital Pacific Bank.
With regard to the core bank, Pacific Continental produced record net income for the year of $16 million. Fourth quarter results overall were in line with expectations discussed in our previous conference call. Highlights for the quarter included strong core deposit growth, continued expense control and improved efficiency ratio, stable net interest margin and solid credit metrics.
Minimal losses, very strong allowances at percentage of net non-performing loans and positive directional credit trends negated any need for addition to loan loss reserves. Loan growth continued for the 14th consecutive quarter albeit at a slower pace. Loan pipelines remains solids suggesting continued net loan growth.
We remain today in an intensive and competitive pricing environment, yet once again our pricing disciplines have help sustain our net interest margin. We will not sacrifice credit quality either losing credit standards to achieve growth. Rationally the bank is strategically focused on future growth both in terms of loans and deposits.
We announced a new expanded Vancouver, Washington, office location scheduled for completion in late 2015 to continue our successful growth is Southwest Washington. Our dental banking footprint grew to 35 states during the quarter while quality performance metrics support the possibility of further expansion.
Most significant, we announced the acquisition of Capital Pacific Bank in Portland, a $255.9 million business bank, which is scheduled to close this quarter. The complementary business model and talent of our two organizations particularly a non-profit, sustainability, and community-based business lending supports further growth in already successful niche segments by giving additional scale to clients both in terms of loans and products.
The combined organization once fully integrated will give us a presence in Portland in that market with pro forma Metropolitan Portland loans and deposits of $591.1 million and $483.9 million, respectively. As previously stated, our long-term goal is to develop a $1 billion presence in the Portland market. With those introductory comments, I’ll now turn the presentation over to Mick Reynolds, who’ll provide some additional color on our financial metrics and performance. Mick?
Mick Reynolds – Executive Vice President & Chief Financial Officer
Thank you, Roger. In my portion of the presentation, I will be addressing our net interest margin, securities portfolio, provide more information on non-interest income and expense, and have some brief comments on taxes. Also when appropriate and as best possible, I will provide listeners and analysts with first quarter 2015 expectations.
Our fourth quarter reported net interest margin was 4.24% and in line with our estimates provided in last quarter’s call. We did see a decline in our earning asset yields as both the yields on loans and securities were down slightly in the fourth quarter when compared to third quarter. However a portion of the decline in earning asset yields was offset by a 3 basis point decline in our cost of funds. The core net interest margin, which removes non-recurring items and accretion of fair value marks was 4.20% for the fourth quarter and remained relatively stable with the prior quarter.
Our net interest margin in the first quarter 2015 is expected to continue to remain relatively stable with the four quarter. This stability is predicated on anticipated loan growth in the first quarter, which should enhance the earning asset mix, thus offsetting possible erosion in the yield on loans and an anticipated lower yield on the mortgage-backed securities in our portfolio.
Turning now to the securities portfolio, at December 31st, 2014, the portfolio had a pretax unrealized gain of $6.1 million, an increase of $700,000 from the prior quarter end as long term rates moved down during the quarter.
The average life and duration of the portfolio at year-end was 3.9 years and 3.6 years, compared to 4.2 years and 3.8 years at December 31st, 2013. We anticipate that portfolio balance will decline in the first quarter as projected cash flows will be used to partially fund loan growth.
Turning now to non-interest income and expense, for the fourth quarter, our non-interest income was $1.3 million and approximately $100,000 above the amount we suggested in our last quarterly call. The higher than anticipated non-interest income was primarily due to increased merchant bankcard revenue as during the fourth quarter the bank received a bonus payment from our third-party vendor for meeting various sales goals during the year.
We anticipate our first quarter 2015 non-interest income will be down from fourth quarter and range from $1.2 million to $1.3 million. Our non-interest expense in the fourth quarter was up $649,000 over the prior quarter, but as noted in our press release, fourth quarter expense included $470,000 in merger costs.
Excluding merger costs, our non-interest expense was in the range that we suggested in our last call. Looking into the first quarter 2015 and excluding merger expense estimated at approximately $4 million, we expect expenses in the first quarter 2015 to be up slightly over the fourth quarter and in the range of $9.4 million to $9.6 million.
Regarding merger expense and assuming our pending acquisition of Capital Pacific closure during the first quarter, we even anticipate either the payment of or accrual of all merger expense related to that acquisition.
Concluding with comments on our tax provision, our effective tax rate was elevated in the fourth quarter, as a result of non-deductibility of certain merger-related expenses. During 2015, we anticipate our effective tax rate will be approximately 35%. That completes my prepared remarks and I’ll now turn it over to Casey Hogan, Chief Operating Officer.
Casey Hogan – Executive Vice President & Chief Operating Officer
Thank you, Mick. Today, I will briefly discuss our key credit statistics and trends and then describe various factors related to the bank’s fourth quarter loan and deposit activity. I will specifically address for the dental loan portfolio and provide an update on the healthcare segment. So let’s begin with credit.
Over all our credit quality statistics continued their positive migration. As of December 31st, non-performing assets as a percentage of total assets declined from third quarter’s 1.08% to 1.02%. The 30-day to 89-day past due ratio was just 0.15%. And the allowance as a percentage of net non-performing loans rose to a robust 786%. For the year, net charge-offs were $280,000 or just 0.03% of average loans.
Classified assets as a percentage of capital ended the year at 24.5% versus the 29% recorded at last year’s end. Consequentially, when combining these factors and the positive credits trends that suggests that our allowance as a percentage of period-end loans, as of December 31st, 2015, are 1.5%, will likely remain adequate in the coming quarter subject to, of course, to unforeseen changes or situations.
Moving to the dental portfolio, these key credit statistics also continued to perform near or above the quality measurements associated with the overall portfolio. Annualized net charge-offs were 0.17% at year-end versus the 0.38% last year. While the 30-day to 89-day past due ratio was 0.11%. Total past dues were 0.3%, the lowest in the last five years.
Let’s now discuss growth trends beginning with loans. Loan growth continued for the 14th consecutive quarter. Period-end loans, as of December 31st, 2014, increased $51.2 million or 5.2% over last year-end.
Growth was centered in both [inaudible] commercial real estate both non-owner occupied as well as owner occupied and commercial and industrial lending. Linked quarter growth exceeded $10.1 million, a contraction in construction loans was primarily related to the conversion to permanent financing and some projects funding as expected with insurance and other long-term financers.
Several unfunded construction commitments were also boarded during the quarter that will fund up in coming quarters. Also, year-end loan growth was somewhat muted by an approximately $7 million and expected year-end closings that were pushed into the first quarter of 2015 for various reasons. Overall, loan growth occurred in all markets except for Seattle where pay-offs continued.
First quarter, the loan pipelines remain solid suggesting continued net loan growth similar to that experienced in the fourth quarter. We remain in an intensely competitive pricing environment, yet again our pricing disciplines have help to sustain our net interest margins.
It is important for you to know that the bank held firm to its disciplined credit standards of quality first followed by profitability and then growth, and elected not to originate or refinance specific projects whose recently reviewed cash outlooks did not meet internal standards.
At year-end, the dental portfolio remain steady with the previous quarter’s end at $306.4 million and represented 29.3% of our total loans. As of December 31st, 2014, our national dental loans totaled 48% of that portfolio or $146.9 million, which represented a 14% increase over last year-end.
Referral opportunities from trusted sources let the bank to expand its footprint to 35 states during the quarter. While competition for dental acquisition loans is expected to continue, we expect to see net growth in coming quarters.
As of December 31st, 2014, our non-dental healthcare banking portfolio grew 13.7% over year-end 2013 to $70.3 million. The majority of this expansion continued to be in veterinary lending both acquisition and owner-occupied financing. The bank continues to evaluate a careful and deliberate expansion in veterinary lending to other states due to the continued strength of the credit metrics.
Net charge-offs for the year were only 0.01%. And total delinquency were still reasonable at 0.63%. We continue to evaluate other medical segments particularly optometry and expect to further expand the healthcare segment during 2015.
Finally, I’m pleased to report that average core deposits increased $45.6 million during the fourth quarter or 4.4%. Growth was experienced in both large and small depositors, those under $1 million, but the predominance of the growth was with our larger depositors.
It is important to note that all market showed solid growth with the Seattle market expanding 5.73% at period end. Deposit pipelines for all markets also remain solid. This suggest strong deposits that may continue into the first quarter of 2015, which is somewhere contrary to our typical seasonal pattern of the positive run-off in the first half of the year. That concludes my comments. I’ll now turn the presentation back to Roger Busse.
Roger Busse – President & Chief Executive Officer
Thank you, Casey. Our acquisition of Capital Pacific Bank remains on schedule and we continue to expect to close the transaction this quarter. We received conformation that the SEC will wave review. Regulatory application has been filed and we expect to receive word by month end.
Based on our comments today, you can tell we remain optimistic and look forward to the first quarter of 2015. Concurrent with our earnings release, we announced a dividend of $0.10 per share. With the acquisition of Capital Pacific, our current capital plan subject to future board action is to retain earnings and accumulate capital in near term.
Our current Tier 1 capital of 11.3% is more than adequate, but also reflects our ongoing strategy of evaluating in-market acquisitions in the $100 million to $400 million range. We have identified targets, modeled opportunities and have performed due diligences. The point I want to make is that we remain active that we are disciplined in our approach to pricing and deal metrics.
With those final comments, we want to invite your questions. As a reminder, Mick Reynolds, Executive Vice President and Chief Financial Officer, Casey Hogan, Executive Vice President and Chief Operating Officer, and Damon Rose, Chief Credit Officer, are able to answer your questions. With that Christine, I’ll ask you to please open the lines for questions.
Operator
All right. Thank you very much. And ladies and gentlemen again if you’d like to come live to the phone lines please press *8 on your telephone keypad. Questions will be addressed in the order that they are received. Again, that is *8 in your keypad and please identify yourself and the organization that you’re with. We do have questions coming into the queue right now, we’ll go ahead to our first question. It will take a second to move up into the queue. Again *8 on your telephone keypad. Hi, please go ahead.
Eric Grubelich – Highlander Capital Group
Hi, it’s Eric Grubelich, a bank investor. Just a question for Casey, maybe I misunderstood this in your prepared remarks when you were talking about the pipeline. I think you alluded to the factor or pretty much said that based on where the pipeline is you are looking for similar growth in the portfolio in the first quarter as you had in the fourth quarter. So would that mean about $10 million or did I misunderstand your information?
Casey Hogan – Executive Vice President & Chief Operating Officer
Yeah, thanks, Eric. That would be in line with our estimation at this point. We had a lot of work in the pipeline. And again, we mentioned the $7 million that kicked over, but we are still continuing to see pressure on other activities that makes us work harder for every loan we get for sure.
Eric Grubelich – Highlander Capital Group
Sure. And then just on the, just second question on the net interest margin. Was there anything in the margin that may have been, if you might consider a little bit of a non-recurring basis pay-off, some type of fee or was it pretty clean this quarter?
Mick Reynolds – Executive Vice President & Chief Financial Officer
Yeah, it was pretty clean. Eric, this is Mick Reynolds. Other than, we had about 3 basis points was the result of the accretion to fair value marks on our acquisition last year.
Eric Grubelich – Highlander Capital Group
Yeah, I know that, I think you have that in the press release. Yeah. Okay, that’s fine. Thanks very much.
Casey Hogan – Executive Vice President & Chief Operating Officer
Thanks, Eric.
Operator
All right. Thank you very much. Our next caller is in the queue. We will go ahead and move them up. Again, please identify yourself and what organization you’re with and please remember to unmute if you had muted. Hi, please go ahead.
Tim Coffey – FIG Partners
Thank you. Tim Coffey, FIG Partners. How you doing gentlemen?
Casey Hogan – Executive Vice President & Chief Operating Officer
Hi, Tim.
Roger Busse – President & Chief Executive Officer
Hi, Tim.
Tim Coffey – FIG Partners
Roger, given kind of where you are in the closing on the acquisition this quarter, what makes more sense in the near-term, additional M&A opportunities or acquiring a team?
Roger Busse – President & Chief Executive Officer
It’s a good question, Tim. We look for both, honestly. We have had opportunities at teams, we’ve looked at that carefully. There is different types of risk associated with that, sometimes reduced if you take a team in. But then again we’ve seen a lot of teams that have been acquired by their institutions not succeed.
Our real focus is on organic growth. And well, Casey is looking for future growth as he mentioned similar to fourth quarter. We are optimistic in our pipelines and that means we may do even better. But the point is, we are focused on organic growth. Then there is real opportunities in acquisitions, but we take them as we come and so our real strategic focus is on what we can do. That’s our organic growth, Tim.
Tim Coffey – FIG Partners
Ok. And speaking on what’s your focus on quality first, good loan growth this quarter, looks like next quarter is setting up well. Has something changed, has the market started to open up to you or you are finding your proposition as a bank has a better, claim better with potential clients?
Roger Busse – President & Chief Executive Officer
Well, I think, in our niche focus, we have a good reputation and a good opportunity for quality loans. What we are seeing is that sometimes the competition is trying to seek these same quality loans primarily by pricing. It also loosens some credit standards.
But with regard to the economy that’s improving and moving forward into the future, I think that we will be an attractive, we’ll continue to be an active and attractive player for these same clients and we’ll win the right ones and we want to continue, we are long term players.
Our focus is to grow with quality, so that we can continue to not look behind in our rearview mirror at potential credit issues. So we want to move forward with quality decisions.
Tim Coffey – FIG Partners
Okay. Well, thank you. Those were all my questions.
Roger Busse – President & Chief Executive Officer
Thanks, Tim.
Operator
All right. Thank you very much we have two more callers in the queue. We will go ahead and move the next caller up. Again, please identify yourself and the organization that you are with. If you still like to ask a question that’s *8 on your telephone keypad. Hi, please go ahead.
Don Worthington – Raymond James
Hi, this is Don Worthington from Raymond James.
Roger Busse – President & Chief Executive Officer
Hi, Don.
Don Worthington – Raymond James
Good morning. Just taking a look at the dental portfolio and the outer market is growing, but the local looks like it’s been shrinking this year. Is that just due to pay-off activity or are you seeing that demand is kind of stagnated a bit in the local part of the portfolio?
Damon Rose – Senior Vice President & Chief Credit Officer
Good morning. Don, this is Damon Rose. I’ll take that one. The local portfolio is a very mature portfolio. So we do get a large number of pay-downs just through normal amortization. So growth is good. The activity in that portfolio is good. It remains very strong. We did this last year, have some pay-offs related to just competitors coming in and underpricing. That does appear to have slowed a little bit, but we do expect that this portfolio this year should remain where it is with the opportunities that we do have in the pipeline.
Don Worthington – Raymond James
Ok, thanks. And then any update on REO work-out?
Casey Hogan – Executive Vice President & Chief Operating Officer
Don, this is Casey. Our properties remain for sale. So if you know of anybody who would like to be an owner, we’d certainly hook them up.
Don Worthington – Raymond James
Ok.
Casey Hogan – Executive Vice President & Chief Operating Officer
That aside, we are seeing activity. We are in discussions, nothing that we would report here today. We continue to be optimistic certainly about a recovering economy that kind of helps some of those properties look more appealing. So we expect to see movement here this year.
Don Worthington – Raymond James
Ok, great. Thanks, Casey.
Roger Busse – President & Chief Executive Officer
We’ll be patient there, Don.
Don Worthington – Raymond James
Ok.
Operator
All right. Thanks very much for your question. We still have about four more callers in the queue. Go ahead and move up our next caller. And if you still like to ask a question that is *8 on your telephone keypad.
Jeff Rulis, DA Davidson
Hi, good morning. Jeff Rulis with DA Davidson
Roger Busse – President & Chief Executive Officer
Good morning, Jeff.
Jeff Rulis, DA Davidson
A question, I had some technical difficulties on the call. Just circling back on the growth expectations. Maybe, Roger, you could just talk about 2015 net loan growth expectations. I got the impression that Q4 growth was expected perhaps if I heard that right in Q1, but is that the type of growth for the full year that you expect? Or maybe just, maybe touch on sort of pay-off activity versus originations and how that dovetails with overall full year growth?
Roger Busse, President & Chief Executive Officer
Ok. So with regard to growth, as Casey mentioned, we expect similar growth in the fourth quarter. And when we say similar, it’s not necessarily limited to the $10 million, we would certainly expect that. But keep in mind that in Casey’s comments today, he mentioned that there were $7 million in carry-overs from the fourth quarter to the first quarter. That should also be included as a consideration. And the pipelines that we currently have remain strong.
With regard to pay-off activity, we saw some pay-offs related to as was mentioned to construction and some of those went to perm, so others were not expected to stay with the bank. So we have funded some construction loans, it will begin to fund up as well. So if you’re relative to the pay-offs that we experienced in the past, they may slow down somewhat.
So, we are fairly optimistic that first quarter growth will be at least equal to fourth quarter if not much better as I mentioned. And then going forward, we expect to see a similar growth minimally to what we saw last year, if not better, and we are just trying to be conservative in our comments. But as we mentioned, we are optimistic on growth.
Then we also have the closure of Capital Pacific Bank. There is going to be opportunities as well there after the closure. There is scale potential with those clients. We have opportunities to expand relationships, and those aren’t even counted into my comments about potential growth during 2015.
Jeff Rulis, DA Davidson
Ok. That’s helpful. And then, Roger, just circling back on that Capital Pacific. If you just, you don’t quite have [inaudible] approval yet and then assuming a shareholder meeting thereafter. This looks like a later quarter close, is that…
Roger Busse – President & Chief Executive Officer
Yeah. It’s, we expect to close this quarter. Yeah, in the first quarter.
Jeff Rulis, DA Davidson
Okay.
Roger Busse – President & Chief Executive Officer
And our integration remains unscheduled as well.
Jeff Rulis, DA Davidson
Great. And then maybe one last one for Mick. The income, the non-interest income and expense guidance, is that exclude any operational impact from Capital Pacific?
Mick Reynolds – Executive Vice President & Chief Financial Officer
Yes, on the expense side in particular and on the income side, that is correct.
Jeff Rulis, DA Davidson
Ok.
Mick Reynolds – Executive Vice President & Chief Financial Officer
Yeah, on the expense side, we do anticipate approximately $4 million of merger related expenses, but that is not included in the estimated $9.4 million to $9.6 million nor would it include any possible additions of expense that could come along assuming that deal closes prior to the end of the quarter. We expected to see some expense related ongoing expenses for Capital Pacific in the first quarter.
Jeff Rulis, DA Davidson
Ok. And not to get too granular, beat this up too much, I was looking at that legal and professional were not included in merger costs. Any, that increase sequentially anything merger related or is that just a completely separate line item?
Mick Reynolds – Executive Vice President & Chief Financial Officer
There should be, it’s a completely separate line item. So there should not be any merger related expenses included in there.
Jeff Rulis, DA Davidson
Ok. Thank you.
Operator
All right. Thank you very much. We have three more questions in the queue. We will go ahead and move up our next caller. Again, please identify yourself and the institution that you represent.
Tim O’Brien – Sandler O’Neill
Good morning. It’s Tim O’Brien from Sandler O’Neill.
Mick Reynolds – Executive Vice President & Chief Financial Officer
Hi, Tim.
Roger Busse – President & Chief Executive Officer
Hi, Tim.
Tim O’Brien – Sandler O’Neill
Thanks for taking my questions. Did you guys add or any change in FTE account at the end of the year versus when you started the quarter?
Roger Busse – President & Chief Executive Officer
There is no significant increase, Tim, in our FTE account, no. And by that I mean, we may have added one or two FTE, but there’s no significant net change.
Tim O’Brien – Sandler O’Neill
Okay, great. And then, Mick, you said that there, how much did you say that that merchant banking bonus, I think you called it, how much, did that amount to $100,000?
Mick Reynolds – Executive Vice President & Chief Financial Officer
Roughly, a little over $100,000, Tim.
Tim O’Brien – Sandler O’Neill
And then, you also said that, Roger, did you say that you’re looking for regulatory approval to come by the end of this month?
Roger Busse – President & Chief Executive Officer
That’s correct, Tim. We have waiver from SEC and we expect regulatory approval by the end of this month.
Tim O’Brien – Sandler O’Neill
And is it, the regulators you’re waiting for approval from, it’s just the FDIC?
Roger Busse – President & Chief Executive Officer
Yes.
Mick Reynolds – Executive Vice President & Chief Financial Officer
And the state of Oregon and then also a waiver from the Federal Reserve Bank since this will be a bank to bank deal.
Tim O’Brien – Sandler O’Neill
Got it, ok. Thanks, Mick. And then another question for you, Mick. Did you say that about $4 million in total deal costs, you guys booked $470,000 this quarter. It looks like, and the rest is going to be accrued pending if the deal closes this quarter, it’s going to happen this quarter right and you [inaudible]. Is that how you are approaching it?
Mick Reynolds – Executive Vice President & Chief Financial Officer
Yes, and that’s correct. And there would be $4 million additional this quarter on top of the $470,000 we had in the fourth quarter.
Tim O’Brien – Sandler O’Neill
And may be a little ancillary kind of clean up stuff in the second quarter possibly, but possible not? Are you pretty determined, Mick?
Mick Reynolds – Executive Vice President & Chief Financial Officer
I’m always determined.
Tim O’Brien – Sandler O’Neill
Great. And as far as the tax impact of that, could there be another kind of tax hit here in the first quarter similar to what we saw in the fourth quarter before it normalizes?
Mick Reynolds – Executive Vice President & Chief Financial Officer
I wouldn’t think it would be quite as high because most of the legal expenses rather way on the investment banking fees are not deductible. We will have a little bit more on the legal fee side, but no, I wouldn’t think the effective rate would be as high as it was in the fourth quarter. But I would expect it to, it could possibly a little higher than the 35% we project for the year.
Tim O’Brien – Sandler O’Neill
And then last question for Casey. Casey, kind of in the narrative about reserves and provisioning, you implied that that $150,000 level is the level you guys are comfortable with, so by extension does that suggest that you guys will provision into similar level for new loans that you guys add in book growth that you have if you are going forward, baring exclusive of the deal of course. Is that how it will work? Or is it really on an absolute dollar basis we are talking?
Casey Hogan – Executive Vice President & Chief Operating Officer
Yeah, thanks, Tim. I wouldn’t suggest that we are going to peg any of our decisions to that $150,000.
Tim O’Brien – Sandler O’Neill
No pegging allowed?
Casey Hogan – Executive Vice President & Chief Operating Officer
Right. So when you look at our coverage of our non-performers at 786% and I mean clearly we do all the right stuff with our impairment analysis and our qualitative and environmental factor now, so all those things, I wouldn’t suggest that you look to that as the peg, but we will continue to be appropriately reserved for sure.
Tim O’Brien – Sandler O’Neill
Thanks for all the help guys.
Casey Hogan – Executive Vice President & Chief Operating Officer
Thanks, Tim.
Roger Busse – President & Chief Executive Officer
Thanks, Tim.
Operator
All right. Thank you for those questions. We have two more callers in the queue. Go ahead and move our next caller up. And again, *8 if you’d still like to ask a question.
Jackie Chimera – KBW
Hi, guys. This is Jacque Chimera, KBW.
Roger Busse – President & Chief Executive Officer
Hi, Jackie.
Jackie Chimera – KBW
I’m was really thinking if I could get a little bit more color on just some of the construction fundings in the quarter since they are a little bit hidden behind what was paid off. I know, if my notes are correct, over the past couple of quarter, there have been a lot of constructions that have gone unfunded and then they continue to roll and fund throughout the quarters. Are there still build ups from past quarters as well as what we was booked in the fourth quarter or did most of that fund last quarter?
Damon Rose – Senior Vice President & Chief Credit Officer
Jackie, hi, this is Damon Rose. Yes, there is still quite a bit of new construction out there that we did book in the fourth quarter or that will be booked here this month that we will continue to build. I think our expectation is that we will see that construction number grow this quarter.
Jackie Chimera – KBW
Were there a lot of fundings that took place in the fourth quarter?
Damon Rose – Senior Vice President & Chief Credit Officer
I wouldn’t characterize it as a lot of fundings, but activity was, I’d characterize it as normal activity.
Jackie Chimera – KBW
Ok. So things are progressing along in funding in a time period that you considered to be reasonable?
Damon Rose – Senior Vice President & Chief Credit Officer
Yes.
Jackie Chimera – KBW
Ok. And then probably a question for you, Mick. Was any of the M&A expense this quarter tax deductible?
Mick Reynolds – Executive Vice President & Chief Financial Officer
Was any of it? Yes, there would have been, some of it was tax deductible.
Jackie Chimera – KBW
Okay. So it wasn’t a 100% tax impact?
Mick Reynolds – Executive Vice President & Chief Financial Officer
That’s correct.
Jackie Chimera – KBW
Ok. And then also, I’m sorry, but I missed your NIM guidance in your prepared remarks.
Mick Reynolds – Executive Vice President & Chief Financial Officer
We expect first quarter to be relatively stable with the fourth quarter loan yield. New loans are still not being booked at rates that would be accretive to the overall portfolio. So very small declines in yield on the loan portfolio because of the lower long term rates. We expect the yield on the mortgage-backed portion of the securities portfolio to be down as prepayments were probably are expected to accelerate. That will increase the amortization of premiums on those mortgage-backed securities. But we think the earning asset mix will create stabilization with more loan growth and higher yielding loans as a bigger percentage of the portfolio.
Jackie Chimera – KBW
Okay. That makes sense. Do you, is there a variance between in-footprint and outer-footprint dental lending in terms of the yield that you are able get on those?
Damon Rose – Senior Vice President & Chief Credit Officer
Hi, Jackie, this is Damon Rose. Actually given the age of the in-market portfolio, the yield is slightly higher today overall. The new loans we are booking, they are very similar in pricing.
Jackie Chimera – KBW
Ok. That’s helpful. Thank you very much. That’s all I had.
Roger Busse – President & Chief Executive Officer
Thanks, Jackie.
Operator
All right. Thank you for those questions. We have our final caller in the queue. We’ll go ahead and move that caller up. Again, please identify yourself and the institution that you represent.
Eric Grubelich – Highlander Capital Group
Hi, it’s Eric Grubelich again. I just had one follow-up question, a little bit more big picture not necessarily about the results. But you did mention and there was a press release out weeks or months ago about the expansion of the Vancouver office. And I was just interested perhaps in hearing from Roger. What is it about that market that is different from a customer perspective or a calling effort perspective then on the other side of the river in Seattle?
Roger Busse – President & Chief Executive Officer
Well, thanks, Eric. There is a lot of similarities actually. But what you have in Southwest Washington is a fairly vibrant in-migration into that area. And the city has had also the Southwest Washington area and the city has had some disruption due to acquisitions that have taken place. So as a result – yeah.
Eric Grubelich – Highlander Capital Group
Let me just correct myself. I meant Portland, not Seattle, I have the geography wrong. Well, give me that, ok.
Roger Busse – President & Chief Executive Officer
I’ll move over to Portland. On the Portland side, the economy is improving nicely and the disruptions aren’t as focus as they were in Southwest Washington. We can target clients and those that are looking for, they are dissatisfied, they are looking for new homes.
In the Portland market, we have active teams that are out there. We have growth expectations. We have robust situation with clients that are starting up new projects. Business formations taking place. Inward migration is also taking place in Portland now and Oregon in general, but it’s one of the top states where inward migration according to the latest reports.
So as a result, we see new opportunities. Projects are starting up, constructions starting up. We get active opportunities at all of those. Our commercial real estate folks, including Charlotte Boxer receiving calls for new projects. So I would say that these are existing clients that are starting new projects or continuing to expand. And then we also have the opportunities once we close with Capital Pacific for scale with those clients to grow that area. So it’s client focused and client growth related.
Casey Hogan – Executive Vice President & Chief Operating Officer
Eric, this is Casey. I would just add that we got an outstanding team of bankers up there in that market as well that work hard and are very well connected in the community and are doing the right stuff up there. So again, it’s going to be great to just be able to provide new houses for them to continue their success up there.
Mick Reynolds – Executive Vice President & Chief Financial Officer
And then, this is Mick Reynolds. And I am not sure, I mean, our bankers whether they are in Portland, Seattle, Eugene, try to approach their customer contacts in the same way. So we are not trying to do anything different in Vancouver that we aren’t trying to do in Eugene and Seattle.
Eric Grubelich – Highlander Capital Group
Ok.
Casey Hogan – Executive Vice President & Chief Operating Officer
Yeah, if you knew our Vancouver office and where we are located in Vancouver, our team has done a remarkable job on growing that market in the space we currently we have. This office allows us to form a more permanent presence, which will continue to accelerate our growth there as well. So that’s a slight difference as well here.
Eric Grubelich – Highlander Capital Group
Ok. Thanks a lot. Have a good afternoon.
Casey Hogan – Executive Vice President & Chief Operating Officer
You too. Thank you.
Operator
All right. Thank you very much. And gentlemen, those are all the questions that have come in. I will turn it back to you for some closing comments.
Roger Busse – President & Chief Executive Officer
Ok, thank you. Well, with that, we thank you for your attendance today and your questions. And we wish you a very good day.
Operator
Great, and thank you very much. Ladies and gentlemen, you may disconnect your phone line now.
