Columbia Banking System Inc (COLB) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. (Operator instructions.) As a reminder, this conference is being recorded.

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

Thank you, Sara. Good afternoon, everyone, and welcome to Columbia's conference call to discuss our third quarter results. 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 of 2009.

I hope you've all had a chance to see our earnings press release from this morning which is available on our website. And we'll be providing additional clarity and details to that information.

After my few brief comments on our regional economy and market share, Gary Schminkey will provide a brief summary of our results for the quarter, including our capital position, net interest margin, and core deposits. Andy McDonald will review our credit quality information, including trends and our allowance for loan losses, charge-offs, and our loan mix. And we'll then be happy to answer your questions.

In our press release this morning, we reported net income for the third quarter of $2 million and -- I'm sorry, and $18.2 million for the first nine months of 2010. Since the economy is still uncertain and recovering slowly, we decided to add a $9 million provision for non-covered loan losses.

While still higher than we would like, it's significantly down from prior quarters. And Andy will go into more depth about our improvements in credit quality a bit later.

We're very pleased with our exceptional level of core deposits, which is an important factor for our stable net interest margin. And at the end of September, our core deposits were actually over 89% of our total deposits. And I think that reflects the strong relationships we continue to build with our customers.

I mentioned in the earnings release that we have been gaining real momentum through the strategic initiatives we've been actively pursuing. Of course, our two FDIC assisted transactions were very significant events for this year. During the third quarter, we completed the integration of the former American Marine Bank into Columbia Bank. The Columbia River Bank conversion was completed during the second quarter. And I am really grateful for all of our employees who worked so hard to ensure a smooth transition for the customers.

The FDIC's recent Deposit Market Share Analysis showed that as of June 30th, 2010 our ranking rose to ninth from 11th among banks in Washington State, and we ranked 12th in Oregon, up from 27th. Of course, much of this market share increase was due to our two acquisitions back in January. But, I'm delighted that we also attained higher market share in important areas that weren't impacted by an increased number of branches due to our acquisitions.

For instance, here in Pierce County where we are headquartered, we still hold the number one position but we now have over 18% of the deposit market, up from 15.5% last year. We've been able to earn market share by taking advantage of the disruptions in the financial industry, and we've found people like to bank with a community bank that values true customer service.

We've talked about other initiatives we are pursuing such as adding strategic bank locations and experienced local teams of bankers in both Washington and Oregon. And while these investments do mean an increase in expenses, they also expand our footprint and put us in a great position to increase our revenue and our market share for both loans and deposits as the economy improves.

An important influence on the third quarter was our redemption in August of the preferred stock issued by the US Treasury as a part of the Capital Purchase Program. And in September, we also repurchased the common stock warrants as well for $3.3 million. And we continue to be well capitalized and have ample sources of liquidity, which Gary will give you more detail on in just a few minutes.

At this point, I'd like to give you an update on how we view the economy in the markets we serve here in the Pacific Northwest. Like the rest of the country, we're getting a lot of mixed signals and often contradictory information as we work our way through these very challenging times. Unfortunately, in many ways, it still feels like the recession persists even though it technically ended back in June of 2009.

The unemployment rate has stabilized but at a high level, and job growth continues to be slow. Washington State's Chief Economist recently said any recovery is partially being delayed by uncertainty as businesses hesitate to hire and spend their capital until they feel more comfortable about tax rates as well as energy and healthcare costs. However, he is optimistic due to our export-driven economy, primarily Boeing and Microsoft, and the ports as well as the military.

Since consumer spending accounts for about 70% of the economy, the unemployment rates are definitely a factor in the slow growth. Washington State's jobless rate in September held steady at 9%, indicating that the job market is in a holding pattern. The rate does compare favorably with that of a country as a whole, which recorded 9.6% unemployment.

Industries in the state which lost jobs during the month include government and construction and the professional and business services sector. Year-over-year, however, the professional and business services sector is actually up over 3% from a year ago. Of course, the unemployment rate tends to be one of the last measurements to improve as the economy recovers.

Manufacturing, driven, of course, by Boeing, created jobs last month. After many well-publicized delays, Boeing is finally getting close to delivering its new airplanes, the 787 Dreamliner and the 747-8, and are getting billions of new orders and commitments.

Other growing industries include wholesale trade, financial activities, transportation and warehousing, as well as retail trade.

I've mentioned before that the military is a huge driver of the economy here in the Northwest with a payroll of about $3 billion. To illustrate this point, the 2010 population for Joint Base Lewis-McChord located just south of Tacoma, including the family members and civilian workers, is well over 100,000 people. And this represents the seventh largest city in Washington State.

The Ports of Seattle and Portland continue to do very well. Both are up over 40% in container volume from 2009. Six cruise lines use the Port of Seattle for Alaska cruises, and they had a record year. Cruise ships docked 223 times and carried over 931,000 passengers.

The Port of Tacoma is beginning its recovery from the loss of a major shipping line to Seattle last year. Its numbers are stabilizing after four years of decreases in volume.

Since September 2009, prices in a four county area in western Washington on closed new construction and resales have declined in a range from 1% to 10%. It's taking an average of approximately four months to sell a house. And new construction closed sales for Pierce County for September were down 6% from August, but they were up 27% from a year ago.

Prices for new construction decreased for the third straight month. Resales for the county dropped 5% over the prior month and 24% from the prior year.

New construction sales for King County dropped 29% from August of 2010 and had a 33% drop year-over-year, reflecting the end of the government tax credit deadline. Closed prices saw an increase of 4% month-over-month and just a slight drop from a year ago. Resales decreased 9% over August and dropped 27% year-over-year. Closed prices saw no change from last month.

In the Metro Portland area of Oregon, median prices for new construction are continuing to decline, but at a relatively modest rate. It appears that steep declines may be behind us. Inventory levels are dropping slowly but builder workout plans are keeping vertical inventory at a higher level than in our Puget Sound market. The low residential construction metrics in Oregon are certainly negatively impacted by the high unemployment rate.

Oregon State's unemployment level has been essentially unchanged for the past 9 months, and has not dipped below 10% for 20 consecutive months. The rate for September was 10.6%, the same as in August, but lower than its peak of 11.6% in May and June of 2009. An Oregon State Employment Economist said that the economy is growing, but not fast enough yet to generate substantial net new jobs.

Interestingly, while the population growth rate has slowed along with the economy and is virtually the same as the US as a whole, highly educated 25 to 34 year olds continue to move to Oregon.

There is some good economic news for Oregon. The Intel Corporation, which has 50,000 employees in the state, announced recently that they're upgrading their facilities in the Portland Metropolitan area. And this should generate jobs in the hard hit sectors such as construction, and then result in hundreds of high tech high paying jobs.

In summary, we're beginning to see some signs of improvement in the economy in both Washington and Oregon, although the recovery is just simply slow. Both states do have a diverse economy, including aerospace and 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.

And with that look at the economy, I'm going 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 $2.5 million for the third quarter of 2010, or $0.06 per diluted common share. This compares to a net loss of $2.6 million, or a loss of $0.11 per diluted common share, for the same quarter last year.

Influencing our third quarter results was the $9 million provision for uncovered loan loss expense recorded during the quarter. While we're happy our credit metrics are improving, we are still facing a lingering softness in our regional economy. Our provision expense, while down from the $13.5 million last quarter and $15 million for the first quarter 2010, is higher than we would like to see.

Net charge-offs for the period were $6.4 million, down significantly from $10.7 million reported in the second quarter of this year. Our allowance for loan losses at September 30th, 2010, was $62.3 million, or 3.22% of total non-covered loans, up from 3.07% of total non-covered loans last quarter. Our non-performing assets decreased about 8% during the quarter to $121.1 million from $131.9 million at the end of June 2010.

Increases in nonaccrual loans over the second quarter of this year were centered primarily in commercial real estate, decreasing $10.8 million, and residential construction, $7 million. The decrease was partially offset by an increase of $5.8 million in restructured commercial real estate.

Non-performing assets, not including the covered assets, ended the quarter at 3.3% of total assets, down from June 2010 at 3.57%, and 3.62% for March 2010.

Loan generation continues to be a challenge. Our non-covered loans ended the quarter at $1.93 billion, down $75 million from year-end 2009 and down $12 million from the second quarter of this year.

Although total loans declined from year-end 2009, our commercial business loan totals grew 2% to end the quarter at $761 million. Commercial real estate loan totals are $819 million, down $37 million or 4% from year-end 2009, while consumer loans are down about $10 million or 5%.

Our commercial construction loans have declined by about $8 million, or 19%, and residential construction has decreased $27 million, or 25%, all compared to December 2009.

As Melanie mentioned earlier, core deposits, which add tremendous value to our franchise, continued to be a real strength for us. At the end of the third quarter, they were 89% of our total deposits. Core deposits rose about 41% from $2.1 billion at the end of 2009 to $2.9 billion at September 30th, 2010. As compared to the second quarter of this year, core deposits rose about 3.6%.

After our full repayment of the Capital Purchase Program funds and warrants, our total risk-based capital ratio at September 30th, 2010 was 24.4%, as compared to 27.3% at June 30th this 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 is over double the 10% minimum to be considered well capitalized. Excess capital amounts to roughly $359 million at the end of the third quarter.

We also measure our tangible common equity to tangible assets. At the end of the third quarter, this ratio stood at 14% as compared to 13.7% at June 30th 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 47%, or over $2 billion, down from 51% at the end of the fourth quarter of last year.

Our tax equivalent net interest margin for the third quarter was 5.24%, up from 4.66% from the second quarter of this year and 4.78% from the first quarter 2010.

During the third quarter, interest reversals related to nonaccrual loans were $139,000. Also impacting the margin in the third quarter was the additional accretion of income over the stated contractual loan rate on the loan portfolios acquired in the two FDIC assisted transactions. The additional accretion increased the net interest margin by 77 basis points. The additional accretion is influenced by many factors and may change from quarter to quarter as we update information related to the acquired loan portfolio.

Net interest margin was also affected by holding larger levels of interest earning cash invested at relatively low yields. Traditional opportunities to deploy excess cash into higher yielding assets is a challenge, as we expect in the near term that cash will be used to take advantage of strategic opportunities.

Average interest earning asset yields have increased 52 basis points to 5.8% from 5.28% for the same quarter in 2009. During the same period, average interest-bearing liability costs have decreased 52 basis points to 0.77%.

Non-interest income was $5.2 million compared to $7.2 million a year earlier, primarily due to a $4.5 million expense related to the change in the FDIC indemnification asset. Removing the change in the indemnification asset, non-interest income totals $9.7 million.

Service charges and other fees increased by $2.7 million from the addition of Columbia River and American Marine.

Our efficiency ratio was 68.33% for the third quarter 2010 compared to 60.85% for September 30th 2009. While we have successfully managed 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 the third quarter were $650,000, and have been about $1.9 million year-to-date. We have also invested in the future growth of the bank by adding teams of bankers and opening new offices.

For these reasons, we expect expense levels in the third quarter to continue at this rate for the foreseeable future. We anticipate decreases in the efficiency ratio will be as a result of increasing revenue, not from decreasing expenses.

Compensation and benefit costs for the third quarter were up $5.7 million or about 48% from a year earlier. Most of this increase was due to the additional staff added as a result of our acquisitions with an increase of 32 branch locations, as well as the addition of new teams of bankers hired to take advantage of market opportunities.

The conversions of both Columbia River Bank and American Marine Bank are now complete, and the operational areas are now combined.

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

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

Thanks, Gary. My comments this afternoon will be focused on our loans not covered under FDIC loss share agreements, which were just over $1.9 billion as of September 30th, 2010.

Loan demand continues to be weak. And as in prior several quarters, we once again saw our non-covered loan portfolio contract a bit. For the quarter, the portfolio declined a modest $11.8 million, or less than 1%.

Consumer loans declined the most during the quarter, as we believe homeowners were attracted to historically low rates and refinanced unsecured loans, HELOCs, and second mortgages into conventional mortgages with other lenders.

However, our focus on commercial business and businesses and their financing needs continues to be rewarded. In fact, commercial business loans were up again this quarter. And this bucket shows growth both year-to-date and year-over-year.

Year-to-date, commercial business loans are up about 2.2%. The portfolio remains well diversified with no industry segment accounting for more than 15%. Our average loan size in this bucket is running just above $200,000 at $212,000 per loan.

Non-performing assets in this portfolio remain stable at $18.3 million, or about 2.4% of the portfolio, and were essentially unchanged from the prior quarter. Past dues for this bucket were also stable at 80 basis points, which was a slight improvement over last quarter's 99 basis points.

In total, the portfolio continues to demonstrate stable credit metrics, as it has been now for several quarters, essentially reflecting the slow economic recovery we are in.

We ended the quarter with $819 million in commercial real estate loans, down slightly from last quarter's $821 million. Approximately $332 million are owner occupied commercial real estate loans. Owner occupied loans saw a modest increase during the quarter, increasing $7 million, which is not surprising given our focus on commercial businesses, as mentioned earlier.

As of September 30th, 2010, we had approximately $39 million in non-performing assets in this bucket, down from about $44 million last quarter. I would like to point out, though, that buried in the $39 million total is $5.8 million of non-performing assets which we were able to return to accrual status during the quarter as a result of successful workout strategies and, of course, the underlying performance of the borrowers.

These loans are obviously classified as troubled debt restructures. However, no principal has been charged off on these projects. So, to some extent, our progress in this bucket is not fully captured by looking at just the level of NPAs. The progress can better be seen in looking at our non-accruals in this bucket, which declined from $36 million to $25 million. So, we feel pretty good about the progress we made in this area this past quarter.

Oh, I should also mention that OREO remained relatively unchanged at $8.1 million, while past dues in the commercial real estate portfolio were also stable at 51 basis points compared to last quarter's 36 basis points.

The commercial real estate portfolio continues to be well diversified with warehouse, office, and retail comprising the largest component. Our average loan size is about $650,000, so we are diversified by both product type and by size.

The one to four family residential loan totals continued to decline as we were able to reduce our exposure lot development loans from $15.9 million to $11.9 million, and our exposure in lot loans from $24 million to $21.9 million.

This was offset by a modest increase in vertical construction of $1.3 million, leaving us with approximately $36.8 million in vertical construction loans at quarter end. The balance, or $9.5 million, represents residential land loans.

The increase in vertical construction loans is consistent with our strategy for problem loan resolution as we continue to take builders vertical in order to sell a completed home. We began the quarter with $46.5 million of NPAs in this bucket, and ended with $39.4 million. So, about 49% of this portfolio is non-performing, which is consistent with prior quarters.

The commercial construction bucket for the quarter remained relatively stable at around $33.9 million. For the quarter, we made advances of $4.9 million, which were offset by conversions to firm of $4.3 million. Approximately 46%, or $15.5 million, of this portfolio is non-performing, which is essentially unchanged from the prior quarter.

Again, there are five non-performing loan in this bucket and one OREO comprised mostly of condominium and retail development projects. The two condominium projects are nearing completion, which will position them well as we enter into 2011.

With that, I would like to turn over the discussion back to Melanie.

Thanks, Andy. As you could hear from Andy's comments, our focus on aggressively managing our loan portfolio has resulted in encouraging improvements in our credit metrics.

As I mentioned earlier, we are focused on improving earnings through a variety of strategic initiatives designed to further our position as a strong regional community bank. Our strong capital has allowed us to take advantage of the disruptions in our industry not just through FDIC assisted transactions, but also through gaining market share as turbulence in the economy and our industry persists.

We continue to have concerns regarding the flatness of the recovery. However, our bankers are outwardly focused to grow the bank by attracting new banking relationships, as evidenced by our increase in deposit market share.

Our reputation for exceptional customer service will continue to open doors for us. And our financial strength provides a level of confidence in our Company that makes us attractive to prospects looking for a regional community bank.

While the recovery has been slow, it is a recovery, particularly here in the Pacific Northwest which has extensive economic diversity. We firmly believe that our investments in talented people, enhanced services, and the right locations will strengthen Columbia for the future and provide real value for our shareholders.

This concludes our prepared comments this afternoon. And as a reminder, Gary and Andy will be available to answer questions along with Mark Nelson, our Chief Operating Officer.

And now, operator, we're ready for questions.

(Operator instructions.) Your first question comes from the line of Matthew Clark with KBW.

Hey, good afternoon, guys.

Hi, Matt.

Just first on the margin, I guess how should we think about, I guess, your excess liquidity weighing down the margin? It looks like it's weighing down the margin maybe 30 basis points or so. Just curious as to how we should think about loan yields and deposit costs and what else may be -- or what might be some additional declines in the strategic portfolio from a yield perspective.

Matt, it's Gary. From the invested balances that we have overnight, I would see that continuing for this quarter. We're currently looking at other opportunities to deploy those funds, but also keeping them for a strategic opportunity. From the investment securities, we -- it's hard to go -- to keep that fairly short right now and pick up any yield.

So, when those opportunities that we talk about from time to time start to diminish, then we'll gradually start investing those funds until we are fully invested.

Okay. And any pricing pressure on the loan side?

This is Mark. We do see some. It's fairly selective. Longer term fixed rate commercial real estate, some of the conduits in the form of life insurance companies have come back into the market on larger deals. And so, we're seeing some long-term fairly low fixed rate deals out there that occasionally might be attractive to a commercial real estate client.

Also, we're seeing some of the larger institutions get pretty aggressive on the pricing side. And we attribute that to perhaps they're getting back into securitizing some of these commercial real estate portfolios. So, there is a bit of that.

We've had a pretty good pricing discipline and some alternatives that we looked at offering our clients that have helped us offset some of that.

And I guess relating to the deposit side, Matt, I really don't see any pressure on that pricing in the foreseeable future unless something changes regarding the Fed or competition in the area. So, I would see that as fairly stable for the foreseeable future.

Okay, great. And then, obviously credit trends have improved more materially this quarter. I'm just curious what are your thoughts on when we might start to see reserve release. Is it just the magnitude of non-performers that need to come down relative to the LV level, or what is it about your reserving methodology that might allow for reserve release?

Well, I guess -- somebody asked me the other day if we had turned the corner. And I said, "Well, I think it's more like we're coming around a bend." So, we kind of continue to remain cautious. But, I think that if the economy continues to trend even in a slow but continued positive direction, then it would not be unreasonable to expect that you might see some level of additional reserves being below what we charge off in the next couple of quarters.

Okay, great. And then lastly, how should we think about the tax rate going forward? It's kind of a moving target. Just curious as to when we might start to see a more normal tax rate or not.

Yes, Matt. This is Gary. We really -- we went through our tax preference items probably in the first six months of the year. And then, with the increased revenue from the accretions and so on, we're probably going to end up in the 20% to 23% range, I would estimate, for the year.

Your next question comes from the line of Jeff Rulis with D.A. Davidson.

Good afternoon.

Hi, Jeff.

Hi. The comment in the release about OREO cost to stay elevated, yet if you track sort of the OREO cost line item, you're sort of booking net gains in the last couple quarters. Is that sort of stating the potential for negated cost going forward, or just maybe if you could -- your experience on OREO sales and maybe thoughts on going forward, what you expect there.

Well, we've been fortunate on the OREO side, as you pointed out, the last couple of quarters. I think what Gary is sort of alluding to is, well, the gains are nice, but underlying the gains is our cost of administering OREO and problem credit workouts.

So, I believe the comments were addressed to be more than just OREO but also to the fact that we're spending a lot more on legal. We certainly had to expand the number of FTE in our Special Credits department and our collection expenses continue to run higher than we would like, which is simply a reflection of, as you know, the credit environment that we're in.

Okay. So, the -- but, the costs in terms of that specific line item, just OREO, in terms of marks to what you've got on the books, they're clearing right now at a neutral or even a small gain. That experience has been and is expected to stay similar?

Yes.

Okay, thanks. And then, just wanted to break out, and you've alluded to this a little bit on the commercial real estate drop out of nonaccruals. Out of that 10.8 decline, could you break that out? I mean, I guess you had, what, 5.8 that were restructured? But the rest, what were charged off and were there inflows there?

Yes, hang on. Let me just get that in front of me. Charge-offs in the bucket were about $1.8 million. We transferred a little over $500,000 to OREO. We had actually $8.1 million returned to accrual, of which $5.7 million is a TDR and the balance just went to a regular accruing loan. We also got payments of $2 million, and we added $1.7 in new accruals.

And then, I guess lastly, Gary, on the expense line item, consolidating your comments there, going forward, I guess any sort of one-time additions or subtractions out of that line item we should be aware of, or this is sort of the base level?

Well, I think, as I mentioned, we had $650,000 included in the third quarter for the conversion expense for AMB. But, other than that, I believe that this would be a baseline expense level going forward.

Okay. Thanks.

Your next question comes from the line of Aaron Deer with Sandler O'Neill.

Hi, Aaron.

Good afternoon, everyone. Following up, I guess, back to Matthew's question, Gary, what kind of cash flows do you have currently coming off the securities portfolio, and what kind of yields are those now being reinvested at versus where they were previously?

Well, we could continue to pick up certain investments from time to time. We're been particularly active in municipals here as we're into the fourth quarter, but really haven't been willing to get into mortgages, mortgage-backed securities, going forward.

We're looking at other opportunities to pick up some yield from the overnight rate. But, I think overall, we still intend to utilize much of that cash for other opportunities at this point. So, when that either materializes or it doesn't, that's when we will make another decision.

But, as far as -- I'm sorry?

Go ahead.

But, as far as the cash flows coming off the securities portfolio, I think this year we had roughly, what, 30 to -- well, $40 million to $50 million, roughly. But, it's been fairly consistent, I mean, as far as replacing it.

But, obviously being replaced at lower yields.

That's correct.

So, that's, I guess, what I'm trying to get at is what's kind of the spread differential between what those were versus what they're being redeployed at.

Well, some of the cash flows coming off have been in the form of mortgage-backed security payments. And we've reinvested in some municipals just because of the higher yield. So, it's actually been kind of a one for one, actually, so far.

So, I guess the earning assets, I think, were up something like $30 million or something in the quarter, if I recall. And then -- but, your NII was down like $1 million. And I guess I'm just trying to get a sense of -- with the -- to the extent that you're deploying some of this excess liquidity versus holding it, which it sounds like you're sitting -- you're going to continue to sit on this for at least a little while. I'm just wondering if we can expect to see further pressure on that NII number.

Well, we had an increase in core deposits in the third quarter, so deposit growth has been stable. So, with the addition of that and our desire to hold excess cash at this point, that has put some pressure on the net interest margin.

There will be a point in the fourth quarter where we will make that decision on what to do with that cash, though.

Okay. And any other additional near term plans for hiring or any luck that you've had in picking up additional teams recently?

I think at this point, we'd really like to get the teams that we have fully engaged and running. So, that's what our concentration is right now.

Okay, great. Thanks for taking my questions.

Thanks, Aaron.

Your next question comes from the line of Joe Morford with RBC Capital Markets.

Hi, Joe.

Good afternoon, everyone. I guess first, just following up on Aaron's question there about the teams, I noticed the C&I balances were up a little bit in the quarter. Was that -- come from increased demand from existing clients, or was it kind of market share gains from some of the new teams? And then, can you remind us, with the teams your brought on, were they more specializing in the commercial business type stuff or more real estate focused?

Yes. The teams we brought on, we always emphasize our C&I as our fundamental, core business. And so, what real estate they might bring with them would tend to be owner occupied by and large, and along with that, C&I business.

As far as our growth in our C&I totals, specifically I can say it's a mix probably almost evenly between the impact of our new teams and the impact of our teams in our existing footprint.

We are advising, though, that growth is coming from taking business from other financial institutions. We're still -- the feedback that we're getting and the numbers that we're seeing, most of our existing customers are more inclined to not want to borrow more. They're sitting on their cash or paying down debt.

Okay. And then, separately was just a question on the credit. You've talked about just how the pace of improvement is slower than you had hoped. Is -- as you -- beyond this NPA number, if you look at like classified asset trends and stuff, as you work stuff out, are you still seeing new inflows? Or, what can you tell us about the pace of inflows, of new problems to classifieds?

Well, this was actually the fourth quarter in a row in which we've seen a decline in our watch list. Although the decline this quarter was a positive in the way we look at it, it was fairly modest decline in the fourth quarter. But, it was still moving in the -- or in the third quarter, excuse me. But, it was still moving in the right direction.

Okay. That's helpful. Thanks so much.

Thanks, Joe.

Your next question comes from the line of Brett Rabatin.

Good afternoon. I wanted to ask -- I joined late, so you may have already addressed this. But, I wanted to ask the capital question and just thoughts on dividends here maybe potentially increasing, and just how patient you'll be with opportunities to grow from an M&A perspective. It seems like the FDIC game is mostly over and open bank M&A may be some time coming. But, can you give some thoughts on capital strategies in the near term?

Well, we're certainly considering a lot of different strategies including just opportunities in the -- there are still going to be failures in Washington and Oregon. But, I agree with you that we've probably seen a lot of the activity that we are going to see. It just continues to be much slower than we had anticipated.

We definitely don't want to just devote capital to do acquisitions that don't make sense for us. But, we're certainly looking at a lot of different opportunities. And I do think that open bank M&A, that we're going to see more of that next year. And I think that we're in a good position to have a chance to be considered as a partner.

Okay. And any comments on dividends or maybe some kind of modest buyback if the deals don't start to come by at some point in time?

Yes. We look at dividends each quarter under a variety of factors. But, at this point, given our net income for the third quarter, we did chose to remain at $0.01, and of course it will be reevaluated as we move forward as the absolute level of net income increases.

Okay. That's good color. Thank you.

Thank you.

Your next question comes from the line of Louis Feldman with Wells Capital Management.

Good afternoon. I too had to step away for a little bit, so, Andy, you have may touched on this. Could you give a little more color on the 5.8 in TDRs and where that popped up from?

Well, that was in our nonaccrual bucket. And we were working with the borrower through the issues that they have, or borrowers, I guess I should say. We were able to get the loans back on to accrual based on their workout strategy and obviously based on the borrowers' performance. That is they've been making payments now for quite some time.

So, the loans that we will display in the TDR section are going to be loans that are on accrual to try to give you some idea, looking forward, in terms of -- because after 12 months we'll be able to get those out of the non-performing bucket.

We continue hold TDRs that are on nonaccrual in our nonaccrual bucket. So, we're simply shifting that, those assets, out of nonaccrual into the TDR, then they'll eventually more out of the TDR-NPA bucket and then just into a TDR bucket.

So, are you inferring that they -- you said they've been paying for a period of time. So, as you move them into the TDR, was that at like the six-month rate level where we've got another six months before they can go back to accruing or three months, or how are you defining that?

It depends on the situation. We'll generally hold three to six months on any transaction. Some we'll hold to 12. In one case, the property was re-tenanted with a credit tenant. And so, after three months, we were willing to put that back on to accrual because of the underlying credit and the company that was paying the lease is very strong. And then, we will hold them in the NPA bucket for an additional 12 months. So, those won't come out for another year.

Okay. Thank you.

But, the point that we're making, obviously, is that the sheer level of problems is actually less than the NPA number indicates.

Your next question is a follow up question from the line of Aaron Deer with Sandler O'Neill.

Hi. Andy, if you could just elaborate on that TDR point a little bit more. I'm curious what the -- can you give the number for what percentage or what dollar volume of nonaccrual loans are TDRs?

We have in the neighborhood of $13 million to $15 million of TDRs in the nonaccrual bucket today. I don't have that exact number, but it's in that range.

And any sense of what of those are poised to move back to performing status?

Well, we'll reevaluate that again in the fourth quarter. But, no, I don't have a good feel off the top of my head on how much we could see coming out in the fourth quarter.

To be honest with you, we don't forecast that number. But, I think as that number becomes larger, we'll probably start spending more time on it.

Great. Thanks for taking my question.

(Operator instructions.) There are no further questions.

Well, thanks, everyone, for joining us. And we'll look forward to talking to you again in January.

This concludes today's conference call. You may now disconnect.