Columbia Banking System Inc (COLB) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the call over to our host, Melanie Dressel, President and Chief Executive Officer of Columbia Banking Systems. Please, go ahead.

Thank you, Bernelle. Good afternoon, everyone, and welcome to Columbia's conference call. Joining me on the call today are Gary Schminkey, our Chief Financial Officer, and Andy McDonald, our Chief Credit Officer. Mark Nelson, our Chief Operating Officer, will also be available for questions following our formal presentation.

As always, I need to remind you that we will be making some forward-looking statements today, which are subject to economic and other factors. For a full discussion of the risks and uncertainties associated with forward-looking statements, please refer to our securities filings and in particular our Form 10-K filed with the SEC for the year 2009.

I hope you have all had a chance to see our results, which were released this morning and are available on our website. We will be providing additional clarity and details to that information.

Gary Schminkey will provide a brief summary of our results for the quarter, including our capital position and net interest margin. Andy will review our credit quality information, including our allowance for loan losses, charge-offs and our loan mix. I'll conclude by discussing our strategies for the rest of 2010 and beyond.

We'll also review the results so far of our FDIC-assisted acquisitions of Columbia River Bank and American Marine Bank, which were acquired in January. We will then open the discussion to your questions.

In our press release this morning, we reported net income for the second quarter of $3.9 million and $10.9 million for the first 6 months of 2010. While our addition to the provision for loan losses was down from the past couple of quarters it was still elevated, reflecting the continuing challenges in the economy.

The results also reflect some significant conversion expenses as we worked to transition our two FDIC-assisted transactions. Gary and Andy will go into more depth about the quarter's results a bit later.

We're pleased that our strength has allowed us to continue to implement the strategic initiatives, which are designed to take advantage of the disruptions we're seeing in our industry and have made it possible to significantly increase our presence in the Pacific Northwest. This, of course, includes the FDIC-assisted acquisitions of the former Columbia River Bank and American Marine Bank, both of which took place back in January.

However, we are also working to increase our presence through de novo branches that make strategic sense for us and by investing in teams of experienced local bankers who will help to reach new customers in relatively untapped markets for Columbia, markets that we really feel are important to us in filling in our geographic footprint.

Last quarter, we opened a full-service branch in the Fox Tower in downtown Portland. This also houses a team of business bankers. We also brought on board skilled bankers who are based in the Salem, Oregon.

We have invested in another team of the bankers who are covering another great potential market, the three-county area of Snohomish, Skagit and Whatcom counties in northwest Washington. These counties will help expand our geographic footprint from Seattle virtually to the Canadian border.

To support these bankers and help us reach these markets, we are currently looking for a couple of new branch locations north of Seattle. Here again, market disruptions have created some wonderful opportunities for us since there are excellent buildings in locations now obtainable that certainly weren't as available at a good value a couple of years ago.

We haven't made these decisions to open new branches and hire talented bankers lightly. However, we do believe these investments will pay off for us in the near future and give us an even better base upon which to build as the economy improves.

As I alluded to a bit earlier, we're a strong regional community bank. We continue to be very well capitalized. At the end of the first quarter 2010 and after our two acquisitions, we had a total risk-based capital ratio of 17.8%. At the end of June, that ratio was 27%.

We've been very fortunate to be one of the few community banks able to raise capital. As you know, we raised $240 million through a successful public offering at the end of April this year in addition to the $120 million in capital we raised in August of 2009.

In addition to our capital, we have ample sources of available liquidity and our net interest margin continues to be stable. We have an exceptional level of core deposits, an important reason we've maintained that relatively stable net interest margin. At the end of June, our core deposits were over 86% of our total deposits and reflect what I believe is the strong relationships we continue to build with our customers.

At this point, I'd like to bring you up to speed on how the process is going for the former Columbia River Bank and American Marine Bank's integration to the Columbia Bank family.

Last quarter, we successfully converted the Columbia River Bank to our system, and the conversion for American Marine Bank is slated for mid-third quarter. I'd just like to take this opportunity to express my sincere thanks to all the employees who have worked so hard to ensure a smooth transition for the customers and for their fellow employees.

During these conference calls, I like to give you a little bit of an update as we see it on the economy in the markets we serve here in the Pacific Northwest. Most economists agree the recession is technically over with many local leading economic indicators pointing upward.

However, like the rest of the country, we are also getting mixed signals such as mixed bag of earning results for this past quarter. I think many people would have liked a more upbeat message from Fed Chairman, Ben Bernanke, who warned last week that the economy is still fragile and unusually uncertain.

We believe the recovery will continue to be slow and that the economic pressures in both Washington and Oregon will continue to be challenging for some period of time. One of the biggest concerns is the unemployment level. Unfortunately, job growth has really lagged behind other signs of recovery.

However, Washington State's jobless rate while still high fell for the third straight month to 8.7% in June from 9% in May. Washington's rate compares favorably to the nation as a whole, which was 9.5%.

The Unemployment Security Department regional economists said we're experiencing subdued growth and that, while we're not going downhill, it's a slow recovery that's playing out.

State-wide, the construction sector gained 2,300 jobs over the past three months. While this would normally would not be considered extraordinary, the construction sector had 23 consecutive months of job losses through the end of 2009. Other industries [having] jobs include education, health services and retail trade.

Our region supports are showing robust signs over 2009. The Port of Seattle saw a 44% increase in container volume through May from the prior year. The Port of Portland volume is up 43%. The Port of Tacoma hasn't rebounded quite as quickly since it lost a major shipping line to Seattle last year, which accounts for a big part of Seattle's -- or, the Port of Seattle's growth.

Washington State is still considered to be in better shape than the national economy. Our highest wage sectors of aerospace and software publishing are relatively stable. For example, Boeing continues to receive additional orders for planes.

In addition, Washington benefits from a large and diverse tech sector, less of a housing bubble, our export-driven economy, relatively inexpensive hydro power and a strong, military sector.

Both resale and new residential construction sales did well in June as buyers rushed to beat the government's tax-credit deadline. New construction, closed sales in Pierce County for June were up 30% from May and were 40% higher than June the prior year.

Prices for new construction increased for the first time in 4 months. Resales for the County were up 23% over the prior year and up 13% from the prior -- or, I'm sorry. Resales were up 23% over the prior month and up 13% for the prior year. Prices really held pretty steady.

New construction sales for King County increased 40% from May of 2010 but had a 1% drop year over year, reflecting the effects of the government tax-credit deadline. Close prices dropped 1% month over month and 16% year over year. Resales increased 2% over May but dropped 23% year over year. Resale prices dropped 3% month over month in King County.

Oregon's unemployment rate has been holding steady for the past 8 months. The rate for June was 10.5%, and for the most recent 8 months it has been between 10.5% and 10.7%. While flat, it is lower than its peak of 11.6% in both May and June of 2009.

National comparisons still rate Oregon's quality of life among the highest in the country. The State continues to be a draw for highly educated, mobile 25 to 34-year olds. Transportation is a strength, and with its lack of sales tax Oregon is also a top state for e-commerce and is rated as one of the top 10 places in the US to be an entrepreneur.

In summary, we're beginning to see some signs for improvement in the economy in both Washington and Oregon although the recovery is simply slow, particularly in Oregon. Both states do have a diverse economy, including aerospace, the well entrenched high tech industry and international exports, which should help us recover more quickly than other areas of the country that lack the economic diversity of the Pacific Northwest.

With that, I'd like to turn the call over to Gary to talk about our financial performance.

Thanks, Melanie. This morning, we announced net income applicable to common shareholders of $3.9 million for the second quarter of 2010, or $0.11 per diluted common share. This compares to a net loss of $6.6 million, or a loss of $0.37, per diluted common share for the same quarter last year.

A primary driver for these results was a $1.35 million provision for loan losses expense recorded during the quarter. Our provision expense, while down from the $15 million in each of the past two quarters, is still elevated and was driven by the lingering softness in our regional economy.

Net charge-offs for the period were $10.7 million, down modestly from $11.5 million reported for the first quarter of this year. As a result, the allowance for loan losses at June 30th, 2010, was $59.7 million, or a 3.07% of total non-covered loans. Our non-performing assets increased during the quarter to $131.9 million from $126.6. million at the end of March 2010.

Increases in non-accrual loans over the first quarter of this year were primarily in commercial real estate, increasing $7.5 million, and commercial business, increasing $1.1 million. The increase was partially offset by a decrease of $5.2 million in residential construction.

Non-performing assets, not including the covered assets, ended the quarter at 3.57% of total assets, down slightly from March 2010 at 3.62% and down from 4.05% at the end of 2009.

Looking ahead, the volatility in the economy makes it highly likely that we will experience elevated provisions for the foreseeable future. Loan generation continues to be a challenge. Our non-covered loans ended the quarter at $1.95 billion, down $53 million from year-end 2009.

Although total loans declined, the good news is our commercial business loan totals are $757 million, up almost 2% from $744 million at December 31st, 2009. Commercial real estate loan totals are $822 million, down $35 million, or 4% from year end, while consumer loans are down about $3 million, or 2%.

Our commercial construction loans have declined by $8 million, or 20%, and residential construction has decreased $22 million, or 21%, all compared to December 31st, 2009.

Core deposits, which probably add the most value to our franchise, continue to be a real strength for us. As Melanie mentioned earlier, they were 86% of our total deposits at the end of the second quarter.

Core deposits rose about 37% from $2.1 billion at the end of 2009 to $2.8 billion at June 30th, 2010. As compared to the first quarter of this year, core deposits declined slightly, less than 1%.

Our total risk-based capital ratio at June 30th was 27.3%, up from 14.6% at June 30th of last year and 19.6% at December 31st, 2009. Our capital ratios are well in excess of the regulatory definition of well capitalized of 10%.

Our excess capital, over and above the 10% minimum can be considered well capitalized, was roughly $433 million at the end of the second quarter. The increase in our capital ratios is a result of our raising approximately $229 million in additional capital during the quarter.

We also measure our tangible common equity to tangible assets. At the end of the second quarter, this ratio stood at 13.7% as compared to 8.3% at March 31st of this year and 11.4% at December 31st, 2009.

Our liquidity ratio is a measure to track the funds available to meet the needs of our customers and for the general operations of the company. We are very pleased to have a liquidity ratio of about 45%, or just under $2 billion, down from 51% at the end of the fourth quarter of last year.

Our tax equivalent net interest margin for the second quarter was 4.66%, down from 4.78% from the first quarter of this year but up from 4.38% for the second quarter of 2009 and 4.3% in the fourth quarter of 2009.

During the second quarter, interest reversals related to non-accrual loans were $532,000, which negatively impacted our net interest margin by approximately 6 basis points. This was offset by a positive impact of about 7 basis points to the net interest margin due to the $605,000 accretion of a discount on the loan portfolios we acquired in the two FDIC-assisted transactions.

In addition, the net interest margin was negatively affected by 18 basis points resulting from our short-term investment of the $229 million in proceeds from our May 2010 capital raise.

So, we are holding much more excess cash than we typically do, much of it in an interest-bearing account. Opportunities to deploy the excess cash into higher-yielding assets is a challenge but, as we expect in the near term, the cash will be used to take advantage of growth opportunities, as Melanie will discuss later.

Average interest earning asset yields have decreased to 5.26%, or 15 basis points, from 5.41% for the same quarter in 2009. During the same period, average interest-bearing liability costs have increased 53 basis points to 0.82%.

As compared to the first quarter of 2010, the yield on average interest-earning assets decreased by 25 basis points, primarily due to holding excess cash. The average cost of interest-bearing liabilities decreased 13 basis points due to a lower cost of deposits.

Non-interest income was $13.2 million compared to $7 million a year earlier. The increase was primarily due to a $3.4 million change in the FDIC indemnification asset. Our non-interest income also increased by $2.9 million in service charges and other fees resulting from the addition of Columbia River and American Marine Banks.

Our efficiency ratio was 68.15% for the second quarter 2010 compared to 63.79% for June 30th 2009. While we have been successfully managing our expenses, the efficiency ratio increased due to increased expenses associated with managing our problem assets, increased regulatory premiums and expenses resulting from our FDIC-assisted transactions.

Our conversion-related expenses for Columbia River totaled about $1.2 million in the second quarter and included vendor costs as well as additional staff to keep the operations running until the conversion was complete.

In the near term, we expect additional expenses to be elevated as we convert American Marine Bank's system and have other acquisition-related expenses, we maintain higher volumes of other real-estate-owned, we work our way through problem credits, open new offices and invest in teams of bankers as we take advantage of opportunities in our markets.

The net gain on OREO was $672,000 for the second quarter compared to a net cost of operation of OREO of $225,000 for the same period last year. For the 6 months ended June 30th, the net cost of operation of OREO was $640,000 compared to $272,000 for the same period in 2009.

Compensation and benefit costs for the second quarter were up $5 million, or about 42%, from a year earlier. Most of this increase was due to the additional staff added as a result of our acquisitions and an increase of 32 branch locations.

As compared to the first quarter of this year, compensation and benefits are up about $500,000, or 3%, due to annual performance increases and additional staff to manage the acquisitions.

The conversion of Columbia River Bank is complete, and the operational areas are now combined. This resulted in a decrease to compensation expense beginning July 1st of approximately $440,000 per quarter.

We anticipate that our investment in banking teams will have a slight impact on our expense ratios this year as these teams build up their portfolios. However, over the long term we expect they will have a very favorable affect on our performance metrics.

Lastly, our Board of Directors declared a $0.01 dividend for the second quarter, unchanged from the past 5 quarters. The Board reviewed our dividend in light of our current market valuation, dividend yield, payout ratio and our desire to retain capital.

Going forward, we will expect that expenses related to the transition of American Marine Bank into Columbia Bank will impact the third quarter of this year as Columbia River Bank impacted the second quarter. We will also have increased expenses to manage the portfolio of problem assets we acquired.

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

As always, thanks, Gary. Okay. First, I would like to note that the numbers I will be discussing are focused on our legacy or non-acquired, non-covered loans.

As you can see from our press release, construction lending now represents about 6% of our non-covered loan portfolio, which is down from just over 19% at its peak in early 2008.

The commercial construction bucket for the quarter remained relatively stable at around $33.4 million. For the quarter we made advances of $6.8 million, which were offset by conversions to [PERM] of $4.3 million, payoffs of $1.8 million and charge-offs of $726,000. Approximately 43%, or $14 million, of this portfolio is on non-accrual. It splits evenly between condo projects and retail development.

The charge-off was associated with one of the condo projects, which is still under construction. We are basically talking about five non-accrual loans in this bucket, so the challenges here are simple, get the projects finished and sold. Outside of these loans, the commercial construction bucket is performing fine and, in general, it's size is so small it's fairly easy to monitor at this point.

The loan [defore] residential construction bucket, which accounts for about 4.5% of our entire non-covered loan portfolio, declined again this quarter as payoffs of $8.3 million, convergence to PERM of $1.2 million and charge-offs of $3 million more than offset advances of $4.2 million.

Non-accruals in this portfolio have declined both in terms of dollars and as a percentage of the total pool for 3 consecutive quarters and now account for about 38%, or $32.6 million. The issues remain mostly in land, lot development and lot loans where we have about half of these loans on non-accrual.

The portfolio continues to be balanced with $35.5 million in vertical construction, $24 million in lots, $16 million in lot development and $9.7 million in residential land loan.

The detail can be found in our press releases. Most of our exposure is centered in King County where we have $36 million in residential construction loans and Pierce County where we have $27.3 million.

The market in King County saw new listings increase during the month of June, which is consistent with the seasonal pattern of residential construction. However, overall listings are down 27% year over year, which I view as a positive sign reflecting the decrease in inventory, which is currently around 6.97 months in King County.

The Pierce County market has actually seen an increase in active listing with a corresponding increase in the number of days on the market, which has resulted in the overall amount of inventory increasing to 9.44 months of supply.

As I mentioned earlier, we had $3 million in charge-offs associated with our residential construction loans with most of them associated with new projects versus additional write-downs on previously charged-down projects.

The segment, which most folks want to talk about these days is commercial real estate. We have $821 million in commercial real estate loans, of which $326 million is owner occupied.

Across product types, the portfolio remains fairly well diversified. Our biggest product types are warehouse, office product and retail, and this is detailed in our press release's Financial Statistics section. The average loan size is approximately $656,000, so between product types and loan sizes we have a fairly granular portfolio.

Non-performing loans, as detailed in our press release, increased to $36.1 million, or roughly 4% of the entire PERM portfolio, up modestly from 3% last quarter. As we have commented before, while this negative migration is disappointing, it is not inconsistent with what we expected for this portfolio at this stage in the cycle.

It's interesting to note that the $12.7 million we placed on non-accrual is comprised of 11 loans ranging from $400,000 to $3 million. We had a couple of office properties, two warehouses, a retail building and some car lots go on non-accrual.

Most of these loans were originated between 2005 and 2008, and all have been re-appraised within the last 9 months and, in fact, 9 of them in 2010. So, consistent with our risk management strategies, as loans migrate negatively we get updated appraisals to make sure we are staying on top of our loan to value.

Now, as most of you know, once a loan is placed on non-accrual we have to do an impairment analysis to see if it might require a charge-down due to any loan-to-value deficiency.

Again, at quarter end, we had about $36.1 million in non-accrual loans, which represented about 50 different loans. Of these 50 loans, only two required any type of impairment at quarter-end for roughly $716,000.

So, again, while the negative migration is unwelcome, it's not unexpected. Our underwriting has held up fairly well, in my opinion. Nevertheless, we did have $499,000 in charge-offs in this portfolio this last quarter. So we have to remain diligent in our approach to managing these assets.

The last bucket I'm going to talk about is commercial business loans. This past quarter, our commercial business loans were up $20 million over the prior quarter, and it was the first time we were able to post an increase in this bucket since March of 2009. A lot of it had to do with increased line utilizations, which we have not seen in quite some time as well.

Similar to the commercial real estate portfolio, this portfolio is also granular. Our average loan size is about $207,000, and no industry sub-segment represents more than 15% of the pool.

Most of the loans in this pool, roughly 66%, are secured by accounts receivable, inventory and equipment. The balance is secured by a variety of assets, including real estate, preferred marine mortgages as well as cash and marketable securities.

I would note about 6% of this pool represents unsecured loans. This portfolio has remained stable as well with non-accruals hovering in the $17 million to $18 million range.

Currently, we have 2% of this portfolio of non-accrual, or $17.3 million, down from $18.4 million last quarter and $18.9 million as of the end of 2009. With that, I would like to turn over the discussion to Melanie Dressel.

Thanks, Andy. As you could hear from Andy's comments, we are, of course, focused on aggressively managing our credit portfolio. However, we are continuing to focus on the strategic initiatives, which we believe will improve earnings, increase our market share and further our position as a strong regional community bank.

I covered several of these initiatives earlier when I mentioned our new banking teams and new branch locations designed to help us reach untapped markets in important areas we feel are really important for our growth. Of course, our strategic acquisitions of the former Columbia River Bank and American Marine Bank were giant steps forward for us.

To summarize, Columbia continues to be one of the strongest franchises in the Pacific Northwest, able to take advantage of the disruptions in our industries. We had multiple sources of liquidity and we're very well capitalized.

Our net interest margin is stable, and we have diverse loan and deposit portfolios. While we have a disciplined approach to expense control, we will not hesitate to invest in those strategic opportunities, which we believe will move us forward in the long term.

The opportunities we're considering for selective acquisitions, including government-assisted transactions, hiring talented personnel to expand our business in new geographic areas as well as focusing on internal growth to augment our market share. Of course, our capital levels allow us flexibility to apply to repay our $77 million in capital purchase program preferred stock.

We have an exceptional core deposit base resulting from a well-earned reputation for delivering excellent customer service. I'm so gratified that our employees who provide that service like being part of the Columbia Bank family.

You may not know that we were recently awarded third place in the large company category for Seattle Business Magazine's 2010 Washington's best companies to work for.

We intend to maintain our dedication to the core values and fundamental business models that have helped us navigate successfully through a difficult economy and to have a strong base from which to operate as the economy improves.

This also helps us to attract those quality individuals to expand our market share. We feel very good about the position we're in today. Despite the current slow economy, we operate in a part of the country that has strong economic diversity. We are in a position to take advantage of the many opportunities provided by that disruption in our marketplace.

This is a period of time in which we believe we can make investments that will position the Company for strength as a more normalized economy emerges.

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

And now Bernelle, you can open the call for questions.

Thank you. (Operator Instructions). We will pause for just a moment to compile the Q&A roster. Our first question if from the line of Matthew Clark with KBW.

Hey, good afternoon.

Hey, Matt.

How are you? Just first on the change in the FDIC versus receivable, is that, the additional fee income this quarter, does that relate to just an updated valuation by the accountants on the underlying value of that asset? Is that just what we saw this quarter?

Hey, Matt, this is Gary.

Hey, Gary.

Yes, the change in the FDIC indemnification asset is a result of the time values related to that receivable. So, for example, if your cash flows move out a little further and you're going to collect more of your cash from the FDIC, then the value of that would go up. The opposite would also be true.

So going forward, if those cash flows change and we were to receive more of that repayments from the actual borrower, then you would see that amount go the other way.

Okay. Okay, great. Then the growth in C&I this quarter, is that partly a function of an increase in the line usage? Or is it more just taking share from the new markets you're in?

I'm going to have Mark take that question.

Hey, Matt. Largely, we're seeing an increase, a modest increase, in our line utilization. That's been trending up the last three months. So I would say probably the largest portion is related to that, although I will also say that right out of the shoot, a couple of our new teams brought in some credits right away. So we're beginning to see some impact of that as well. But it's small at this point.

Okay, and then a related question on the non-interest bearing deposits as well; is that a function of C&I customers, just new C&I customers placing deposits with you? Or is there something seasonal in the quarter?

Yes, it's probably a little early to understand the seasonality aspects of our two new partners there. That's, I would say, really based on our focus of retaining CD deposits from the other banks that we've acquired and converting them into our core deposit base.

All right, and then just lastly, in terms of deals, can you give us an update as to what you might be seeing out there, whether or not things might be taking up on FDIC front, whether or not we're moving any closer to traditional M&A or not?

With each quarter, I think that we are moving closer to open bank transactions. I still think probably towards the end of the quarter or at the end of the year that we will have better clarity who is going to survive and who isn't.

It doesn't mean that it's all going to be over, but it is going to be a little bit clearer. At that point in time, I think that we're going to see a bigger uptick in open bank transactions.

Okay, thank you.

Thank you. Our next question is from the line of Jeff Rulis with D.A. Davidson.

Hi, Jeff.

Hi, good afternoon. I guess this first one is for Andy. There's been several peers in the region discussing -- they're seeing actual credit risk rating upgrades matching or exceeding downgrades for the first time in a while, I guess; if you could touch on the experience that you're having on those upgrades or downgrades.

Yes, our overall trend is we have been seeing a decline in our watch list over the last several quarters. Is that what you were looking for?

Yes, I mean, and just in that, I guess, new problems aren't outpacing things going out. That's fine.

Yes, I guess that we ought to just give you a little bit more color. If you think of it as a pipeline, we still negative migration in the problem loans. So we're not backfilling with new ones.

Okay, I guess, put it in another way, if you look at the past-due balance, [16-4 felt] at $12 million; not a big drop, but if you could -- of that drop, was that flow into nonaccruals or brought current or charged off?

The past-dues for our bank and balance from 10 to 15 and back to 10, a lot of times, it's just a function of business activity and not really any credit quality kinds of indicators.

So we were just able to resolve more issues at quarter-end this year, or this quarter, than we were in the first quarter. So the decline in past-dues wasn't the result of necessarily negative migration or charge-offs.

That's actually bringing that current then --.

Yes

-- essentially, okay. Then, Gary, you touched on this a bit on the conversion costs for American Marine. Would it be safe to assume that the cost for American Marine wouldn't match the level of Columbia River? Is that, essentially, the same amount of cost?

No, not necessarily the same amount of cost.

Okay.

Columbia River used more staff to maintain the old systems than American Marine does currently have. As far as doing the actual conversion where you have to map field to field and you have vendor cost to do that, I could see where that could -- where they might be similar because you do a large conversion or a small conversion. You still have to do the mapping and everything else.

So the third party cost could be about the same. But the staff to maintain the systems at American Marine are much less than Columbia River.

So, in total, we could expect to step down in that total cost?

Yes. When we talked about this at the end of the third quarter, the amount that we would save going forward in the fourth quarter would be less than Columbia River.

Okay, and then lastly, I guess, for Melanie; I know you've been asked this a ton of times on the TARP repayment. But at this point, even post-TARP repayment, you'd be close to 2.5 times the regulatory minimum for well-capitalized and becoming more profitable.

Right.

Any sense the Board that you're pushing forward on this; or, I guess, what's the sense if anything's changed in the last little while?

The Board absolutely discusses it all the time. It's one of those things that you just weigh against other strategic activities. I think that --.

So the decision is more of a growth concern rather than a safety concern?

Yes.

Okay. Okay, that's it for me. Thank you.

Thanks, Jeff.

Thank you. Our next question is from the line of Joe Morford with RBC Capital Markets.

Hi, Joe.

Hi. Good afternoon, everyone. First question was on credit. I just was curious. Cumulatively, how much have your NPA's been written down from their original balances?

That's about a third.

Okay, 33%. All right. Then the second one was just on expenses. Recognizing the American Marine conversion still to come and still expecting to realize a fair amount of synergies there with Columbia River, and you're also still hiring new people, if we look ahead fourth quarter and maybe even first quarter of 2011, what sort of a normalized run rate do you expect to hit on the expense line?

That's a tough question, Joe.

We're all --.

I thought I'd challenge you, Gary.

I think we'll have to defer on that one until we have a little more history here because we do have some teams, as Melanie talked about, coming on. We will have more facilities as well for those individuals. So to come up with a good run rate, I'm not sure I have that today for you, Joe.

Okay, I understand. I appreciate the help.

Thank you. Our next question is from the line of Aaron Deer with Sandler O'Neill & Partners.

Hi, Aaron.

Good afternoon, everyone. I'm not going to let you off the hook so easy on the expense question because it does seem like this is a pretty high run rate. Are we talking about being able to get back down into the low 30s here? Or are we kind of stuck here in the mid 30s for a while?

We have grown expenses in the salaries. We've hired additional people to collect on the problem assets and so on, and we've hired the teams.

So it's certainly the case that we haven't realized all of our expense controls that we want to realize. But on the other hand, we're really looking to grow on the revenue side. That's, I think, the important thing to remember for our efficiency ratio, is that we're set up to grow revenue as things start to turn.

I think that's probably where you'll see us make the changes. We will certainly have some expense savings as we move forward. But you'll see the greatest benefit on the revenue side.

I think that there are additions of new teams. Of course, the CRB and AMB acquisitions make it difficult to see. But we've made a lot of headway, I believe, on efficiencies within the core operation. That's something that we worked on really hard during the slower times because of just the whole economic situation.

We feel as though we've invested in those areas that generate revenue, and we've become more efficient in those areas where we can. The overall expense is going to continue to be elevated until we get through this particular cycle. But I do think there's going to be a lot more clarity when we get into the fourth quarter.

Okay, in that case, have you set some targets on the revenue side? Or maybe the better way to look at it on the -- with these new teams that you've brought, what are you expecting in terms of loan growth over the coming year?

Are you talking about percentage or absolute dollars?

However you want to look at it. I'm trying to figure out how we can try to offset this larger expense load because I know, obviously, it's a challenge for all the banks right now to be growing their loan books. It looks like some runoff from the covered portfolios. That's another headwind to deal with. So I'm just trying to envision where the revenue gains are going to come from.

All right. Well, let me put it this way first, and this is a question, of course, we visit with our board before we ever make decisions to bring groups of folks on like this.

We do a pretty disciplined budget process and analysis of what they're going to be able to do before we agree to move ahead on these hiring decisions. So we add those numbers into our budget, and we track that pretty closely. I don't have either of those two budgets for our two new teams right in front of me, Aaron.

So I can't give you specific numbers. But that, I believe, with the modest growth, we begin to see in our portfolio going forward as our new footprint gets back out there and lands and we see, perhaps, some seasonal growth with our own business base here in the traditional Columbia footprint. I fully expect we're going to see a net growth in our loan portfolio by year-end, in that case, picking up a bit in 2011.

Okay, that's encouraging. Then one last question, if I may; TDRs in the quarter, can you -- I don't think I saw this in the press release. What were total TDRs and what percentage of those were non-accrual versus accruing?

We do have a number of TDRs. The amount that would be on accrual I think at this point in time is just a couple hundred thousand. We continue to keep our TDRs on non-accrual.

Since most of our TDRs at this point in time are associated with residential real estate development that require asset sales as opposed to recurring revenue streams from the sale of a product or a service or a lease stream, we're not comfortable taking the loans off non-accruals until the housing market -- I'm not saying it has to get better, but it just has to -- I want a couple of quarters of very stable, predictable housing activities before I'm going to move any of my TDRs off non-accrual.

Thanks for answering the questions.

Thank you.

Thank you. Our next question is from the line of Brett Rabatin with Sterne Agee & Leach.

Hi, good afternoon.

Hi, Brett.

I wanted to ask a little more color if possible on the comment that you gave about elevated provisioning for the foreseeable future, just given the discussion you had about watch list loans decline over the past several quarters and the negative migration and problem loans still occurring with no backfill. When you say elevated provisions, can you give a little more color on that comment? Could we --?

I can take a stab at it then hand it over to Andy. I probably should have said that elevated in comparison to more normalized economic times.

Yes, what we're seeing is, in our provisioning, we're seeing a shift out of the construction asset, which are requiring less and less provisioning and an increase in some of the provisioning that's required in the C&I and the PERM commercial real estate portfolio. So there is somewhat of a shift or migration in the provisioning.

The assets that require the most provisioning are the classified assets. So while we're not backfilling with credits that are rated higher than substandard, we are seeing the ones that we have a watch category and then a special mention category, then a substandard category.

What we have seen is that we're not filling in in the watch category any more. So that's continuing to decline. The special mention category is also declining, but the flow is still holding relatively steady in the substandard category, which requires the highest level of provisioning.

So until we actually see the substandard category declining, we anticipate that provisioning will be higher than what we would expect in a more normal environment.

Okay, that's great color. Then just secondly, I wanted to maybe talk a little more about the retail and the lodging commercial real estate piece. I know you've been taking a harder look the past few quarters at that segment on commercial real estate.

It sounded like most of the CRE that was put in this quarter was not related to that, but sort of a miscellaneous office and other things. Can you talk about that portfolio a little more and specifically what you're seeing there in terms of how those loans are performing?

Yes, the retail portfolio, it continues to be one of the more stressed product segments. But what we're finding is that we're able to reposition, or our borrowers are able to reposition the properties, or at least get new tenants in.

Even though the tenants are coming in now at a lower lease rate, because our underwriting was relatively conservative, I guess, relative to what we saw some of the other lenders do, especially the conduits and the life companies, the loans-to-values have declined and the NOIs have declined. But they're still able to service our loans. So that has kind of served us well there.

The hotel/motel segment; we have seen some weakening there. Principally, the areas that we've seen have the biggest issue are not the hotels and motels that are related to vacations or recreational usage, which is primarily what we have out on the coast of Oregon, but it's really been the properties that are located in more urban areas that are related to business travel.

So that segment that the business travel segment represents about a third of our hotel exposure. Our hotel exposure is about $60 million.

Okay, great. Thanks for all the color.

Thank you.

Thank you. (Operator Instructions). I am showing no further questions at this time.

Okay, well, thank you all very much for joining us this afternoon. We'll talk to you next quarter.

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