Columbia Banking System Inc (COLB) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's second-quarter 2011 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 your host, Melanie Dressel, President and Chief Executive Officer of Columbia Banking System.

Thank you, Suzette. Good afternoon, everyone. I would like to thank you for joining us on today's call to discuss our second-quarter 2011 result. I hope you've had a chance to review our earnings press release which we issued earlier this morning.

With me on the call today are Gary Schminkey, and our Chief Financial Officer, and Andy McDonald, our Chief Credit Officer. Mark Nelson will also be available for questions following our formal presentation; and Mark is our Chief Operating Officer.

Gary Schminkey will begin our call by providing details of our earnings performance for the quarter including our capital position, net interest margin, and core deposits. Andy McDonald will review our credit quality information including trends in our loan mix, allowance for loan losses, and our chargeoffs.

I'll conclude by briefly giving you our thoughts on the economy in the Pacific Northwest and discussing our ongoing strategies as we move forward. We will then be happy to answer your questions.

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 the forward-looking statements, please refer to our securities filings and in particular our Form 10-K filed by the SEC for the year 2010.

Now I will turn the call over to Gary to talk about our financial performance.

Thank you, Melanie. Earlier this morning we announced earnings of $8.6 million for the second quarter, a 119% increase from $3.9 million for the same quarter last year. The increase in net income was primarily attributable to a strong net interest margin and a lower provision for loan losses due to improving credit metrics.

In May of this year we assumed the deposits and acquired substantially all of the assets of Summit Bank and First Heritage Bank through two FDIC-assisted transactions. With the Summit Bank transaction, which had three branches and was headquartered in Burlington, Washington, we acquired tangible assets with a fair value of $127 million. Substantially all of the acquired loans and other real estate owned are subject to a loss-sharing agreement with the FDIC.

We also assumed liabilities with a fair value of about $131 million, including $123 million of deposits. The transaction resulted in goodwill of $3.8 million and a core deposit intangible of $509,000.

First Heritage bank, headquartered in Snohomish, Washington, included five branches. We acquired tangible assets with a fair value of approximately $158 million including $82 million in loans.

Again, substantially all of the acquired loans and other real estate owned are subject to a loss-sharing agreement with the FDIC. The transaction resulted in goodwill of $5.9 million and a core deposit intangible of $1.3 million.

It is important to remember the fair values for these transactions are preliminary and subject to refinement for up to one year after the closing date of each acquisition, as additional information becomes available. We had originally modeled these transactions to produce a small gain. Due to the fair value of the acquired loans coming in less than predicted, we recorded a relatively small amount of goodwill for each transaction.

We provided a table in our earnings release showing the impact of the accounting entries associated with our acquired loan portfolios. For the quarter we recorded $8.8 million in incremental accretion over the contractual rates dated in individual loan notes.

The amortization of our FDIC loss-sharing asset was $6.4 million, and the expense related to the clawback liability was $448,000. The variability of the loss-share results will continue as changes occur in cash flows derived from the loan pools, expected losses, and pre-payments fees, all of which are reviewed quarterly.

Our tax equivalent net interest margin for the second quarter was 5.49%, up from 4.66% for the same quarter last year. The margin was positively impacted 96 basis points by accretion income related to our acquired loan portfolios. It was negatively impacted by 1 basis point by interest reversals of $139,000 related to loans moving to non-accrual status during the second quarter.

Removing the accretion income, net interest margin was 4.53% for the second quarter of this year and 4.48% year-to-date, the high end of our historical operating range.

Average interest-earning asset yields increased 65 basis points to 5.91% for the second quarter this year from 5.26% for the same quarter of 2010. During the same period, average interest bearing liability costs have decreased 22 basis points to 60 basis points.

Turning to noninterest income, after removing the effect of the change in the FDIC loss-sharing asset, noninterest income for the quarter was virtually unchanged from the same period last year, increasing $123,000. When compared to the second quarter of 2010, merchant services income was down $105,000 primarily due to decreased volume. Other noninterest income was up from the second-quarter 2010 by approximately $191,000 due to increased [loan] customer interest rate swap activity.

Our efficiency ratio was 69.5% for the second-quarter 2011 compared to 68.2% for the second quarter of last year and 73.3% for the first quarter of this year. While we have been carefully managing our expenses, the efficiency ratio is elevated due to increased expenses associated with managing our problem assets, integration costs resulting from our four FDIC-assisted transactions, and we have also continued to invest in the future growth of the Company by adding teams of bankers and opening new offices.

We still expect total expenses as reported to continue at these levels for the foreseeable future. The efficiency ratio is certainly higher than we would like, as opportunities to increase earning assets such as loans has been challenging in the current economic environment, although it was good to see net new loan growth during the quarter.

On a linked-quarter basis, salaries are up $538,000 in the second quarter due to our FDIC acquisitions; and net cost of real estate owned is up about $650,000. These increases were partially offset by a $900,000 or 42% reduction in regulatory premiums as compared to the first quarter of this year. We expect regulatory premiums reported in the second quarter will approximate the quarterly expense for the remainder of the year.

We recorded a tax expense of $2.7 million for the second quarter, for an effective tax rate of about 23.6%. Our effective tax rate remains lower than the statutory tax rate due to our non-taxable income generated from tax-exempt loans and municipal bonds, investments in bank-owned life insurance, and low-income housing credits. We still expect an effective tax rate in the range of 22% to 26% for the remainder of the year.

We have seen an improving trend in loan originations this quarter. Our noncovered loans ended the quarter at $1.93 billion, up $72 million or 4% from the end of 2010, with increases centered in commercial business and commercial real estate lending.

Our commercial business loan totals increased 5% from December 2010 to end the second quarter at $837 million. Commercial real estate loan totals are $843 million, up $49 million or 6% from year-end. Real estate construction loans have declined by about $16 million or 16%, and consumer loans are down about $4 million or 2%, both compared to year-end 2010.

At the end of the second quarter core deposits were up $144 million from year-end 2010 to $3.1 billion or 91% of our total deposits. This is up from 90% at the end of 2010.

Our total risk-based capital ratio at June 30, 2011, was 24.2%, down from 24.5% at year-end. The tangible common equity to tangible assets at the end of the second quarter stood at 13.8% as compared to 14% at December 31 of last year. We continue to have strong liquidity with over $2 billion in available funds.

Total securities available for sale were $989 million at June 30 of this year, an increase of over $102 million during the second quarter and a $226 million increase since year-end. We have maintained our conservative investment philosophy as we have added to the portfolio.

The average tax-equivalent yield on the portfolio was 4.12% for the second quarter and 4.22% for the first six months of this year. This compares to 4.55% for the second quarter of last year and 4.71% for the first six months of last year. The annualized portfolio gain at June 30 was approximately $33.6 million.

Lastly, our Board of Directors declared a $0.06 dividend for the second quarter, an increase of $0.01 or 20%. We are certainly pleased to be able to increase our dividend again this quarter.

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

Thanks, Gary. As usual I will begin my comments by discussing our loans not covered under FDIC loss-sharing agreements, which are approaching $2 billion as of June 30, 2011. For the quarter, our nonperforming assets continued to decline, allowing us to once again post improving credit metrics. As of June 30, nonperforming loans to period end noncovered loans declined to 3.33% from 4.53%; and nonperforming assets to period end noncovered assets declined from 3% to 2.72%.

Past-due loans were also very modest this past quarter, representing only 38 basis points of total noncovered loans. So in general, we are pleased with the direction the loan portfolio is moving.

As detailed in the press release, we had inflows of $7.8 million into the nonperforming category and had outflows of approximately $19.3 million, including $4.2 million in chargeoffs associated with nonperforming assets. The only significant chargeoff for the quarter was in the commercial real estate construction pool.

In fact, it was the only chargeoff in the pool, and represented an additional charge-down related to a condominium project in southwest Washington in which we received an updated appraisal during the quarter. This chargeoff along with a payoff of a $9.2 million performing construction loan were responsible for the decline in our commercial construction pool during the quarter.

Unfortunately, in today's market the cost of construction still exceeds the cost of acquisition. As such, we see very few opportunities for commercial construction loans. So while we would like to see some growth in this category, there is just not a lot of construction activity occurring in the markets we serve.

Our one-to-four-family construction pool showed the largest decline in nonperforming assets for the quarter, with NPAs declining 21%. The decline was primarily payments due to completed home sales and OREO sales during the quarter. Year-to-date we had reduced NPAs in this pool by about a third; and in total one-to-four-family construction assets represent about 20% of our total nonperforming assets.

The pool itself has become relatively small in relation to the rest of our portfolio, now representing only 2.6% of our noncovered loan portfolio. About half the pool is in the vertical construction stage, and our residential land exposure is now down to $8 million.

For the quarter, we had $805,000 in chargeoffs in this pool, mostly related to residential land. So we are glad our exposure in this area has been greatly reduced.

The commercial business loan portfolio grew about $54 million during the second quarter with most of that growth coming from the agricultural and fishing segments, which accounted for about a third of the increase, followed by professional services, manufacturing, health, and social services. We would expect some of the growth in the agricultural and fishing segments to contract later this year, commensurate with the growing and harvesting cycles associated with the various commodities.

For the quarter, the commercial business pool enjoyed a modest 4% decrease in nonperforming assets, with nonperforming assets now accounting for approximately 3.3% of the total noncovered commercial business loans, compared to 4.3% at December 31, 2010. Commercial business assets account for about 27% of our nonperforming assets.

The noncovered term commercial real estate portfolio also exhibited nice growth during the quarter. Originations were primarily centered in retail, multifamily, warehouse, and manufacturing property types.

I would like to give you a little color on the types of term commercial real estate loans we made this past quarter and assure you would that we have not compromised our underwriting standards. For example, retail property-type loans increased $16 million during the quarter, and approximately three-fourths of these were to projects that have credit tenants. In total, the average loan-to-value for our retail originations was around 59%, with a debt service coverage ratio of 1.73.

In the multifamily space, we grew loans here a little over $14 million during the quarter. Originations here had an average loan-to-value of 58% and a debt service coverage ratio of 1.51.

Finally, at the expense of being repetitive, we grew our warehouse portfolio by $12.9 million. The average loan-to-value for properties added in the second quarter was 53%, with a debt service coverage ratio of 1.52.

The noncovered term commercial real estate portfolio also exhibited improvement in its credit metrics, as nonperforming assets declined 9% during the quarter. Nonperforming assets in this pool now account for about 4.4% of term commercial real estate assets, down from 5.3% earlier this year. Nonperforming term commercial real estate assets represent about 37% of our nonperforming assets as of June 30, making it our largest segment of nonperforming assets.

In looking at our nonperforming assets in this pool, I can say that they are evenly spread out amongst different property types, with office comprising the largest component at around $8 million. The data, though, is a bit skewed due to our largest nonperforming commercial real estate asset being a $3.2 million office building in south Seattle.

The next largest segment is commercial land at $4.8 million, with the balance evenly spread out amongst retail, warehouse, hotel, and other real estate types. The average nonperforming term commercial real estate asset is approximately $475,000.

Moving on to the consumer portfolio, it held steady during the second quarter at a little over $177 million in total loans. NPAs rose modestly during the quarter, increasing by $667,000 to $6.9 million.

Chargeoffs were minimal this past quarter at around $271,000. Year-to-date annualized net charge-offs equal about 135 basis points. This compares favorably to the FDIC statistics for March 31, 2011, which showed an average net charge-off rate for similar loans of 221 basis points.

For comparison purposes, I am looking at the FDIC statistics for home equity lines of credit, as about two-thirds of our consumer portfolio is made up of home equity lines and about three-fourths is secure by one-to-four-family residences.

The acquired portfolio, which is substantially covered by FDIC loss-sharing agreements, was approximately $847 million as of June 30 on UPD basis, up from $659 million last quarter. The increase, of course, had to do with the two FDIC-assisted deals we did this past quarter.

Excluding the loans added from the FDIC-assisted deals we did, the UPD balance would have declined to $615 million. So the pace of resolution within the covered loan portfolio has not slowed down.

The majority of the portfolio continues to be in real estate, with both construction and permanent loans accounting for about 65% of the portfolio, down from 70% last quarter as the last two FDIC deals we did had a larger percentage of commercial business loans in their portfolios.

Commercial business loans now account for 28% of our covered portfolio, up from 22% last quarter. The consumer content as a percentage of total covered loans remained essentially unchanged at 8%.

Past dues in the covered portfolio were just over $50 million, or around 6% of total covered loans. Nonperforming loans represent about 16.9% of the portfolio on UPD basis, which is actually an improvement from last quarter, when it was 18.9%. But I would expect that, similar to the two deals we did last year, we will see this ratio rise as we dig deeper into the newly acquired portfolios and as we move healthy customers out of the covered portfolio and into the noncovered portfolio with renewals and new loan originations.

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

Thanks, Andy. I think we're all getting used to seeing a mixed slate of economic reports as we move toward a more normalized economy. The markets we serve here in the Pacific Northwest are expected to essentially mirror that of the national economy, with short-term weakness followed by slow improvement during the second half of the year.

The primary reasons for this very slow turnaround are the continued sluggish hiring along with high gas and food prices. We have also been dealing with supply-chain disruptions caused by the crisis in Japan, although these factors seem to be fading.

The jobless rate tends to be one of the last indicators to improve as the economy recovers. Industries in our area forecasted to be the fastest-growing include professional and business services, leisure and hospitality, education and health services, and transportation and utility.

With more people looking for work, Washington's unemployment rate moved up slightly last month to 9.2%, up from 9.1% in May, even though officials reported a net gain in jobs. June was the 10th straight month of net job gains, and the state has regained about one-quarter of the jobs lost during the recession.

In both Washington and Oregon most of the jobs lost were in government, along with construction, financial activities, and education and health services.

Oregon's unemployment rate in June rose slightly to 9.4%, although their employment department recently reported that job growth surged in the first quarter of 2011, with over the year growth faster than at any time since the first quarter of 2007. While private businesses in Oregon added almost 4,000 jobs during the month, government agencies cut a total of about 3,000, with local school districts being hit particularly hard. Total private employment in Oregon is up by almost 30,000 jobs compared to a year ago, and that is that 2.3% increase.

On the other hand, budget reductions have cut government payrolls by 3% in the past 12 months. A good sign -- employment agencies added about 700 jobs, which is considered a bellwether for future hiring of permanent employees by companies.

So again, both states expect moderate job growth for the rest of the year and through 2012. These jobs will come from the private sector, as government is still likely to cut their payrolls this year as they struggle to balance their budgets.

The ports in the Pacific Northwest have been impacted by the world economy as well. However, the ports of Seattle and Portland did very well in 2010, with container volumes and imports increasing significantly. We have recently seen some decline in international shipping the past few months, as exports have flattened out this past year.

The Port of Tacoma's container volumes continue to rise, with a 15% increase in May, boosting their year-to-date volumes by a total of 6%. The trend is primarily due to strong demand for Pacific Northwest agricultural products.

We are still seeing reductions in trade activity to Japan as it recovers from the devastation. But there are signs of rebuilding activity with corresponding increases in exports.

It's interesting to look at Washington's top five exports last year. As you would expect, the number one by far in 2010 was aerospace and parts, which accounted for about $23.3 billion; followed by agriculture, high tech, industrial machinery, and oil from petroleum. Our top 10 markets are China, Canada, Japan, the Republic of Korea, Indonesia, Taiwan, Germany, Ireland, Qatar, and Turkey.

As we look at the housing sector, we are also seeing some mixed results in our market areas. Pressure from foreclosures and short sales persist, resulting in lower prices for the resale market in all the communities we serve in Washington. However, we are seeing that new housing price levels are faring better than resale. In Snohomish and [Serchman] counties prices showed a modest increase in new construction.

In the Metro Portland area of Oregon, median prices for new construction are continuing to decline, but at a relatively modest rate. It appears the steep declines may be behind us.

In addition to Boeing's successful bid for the $35 billion contract to build air refueling tankers, the company is also getting significant orders for commercial aircraft, the most recent being from American Airlines, who is purchasing 200 737s. The tanker deal alone should result in 11,000 direct and indirect jobs in Washington.

I mentioned earlier about seeing a mixed slate of economic reports and that, while we are seeing a recovery, it just continues to be slow. So while I am truly enthusiastic about what lies ahead of us, we do have some challenges moving forward.

As we have mentioned, we are encouraged by some good, solid loan growth during the quarter. In fact, we saw almost $200 million in gross new loan production during the quarter.

This growth and increased market share in loans didn't happen by accident. Virtually all of our banking teams have recorded successful results as they worked with our current customers to deepen their relationships with us. We have also been successful in growing loans in our newer communities as well, as Columbia Bank has worked hard to identify good customers in these important new markets for us.

But again, despite this encouraging trend, there are still challenges. Our line of credit usage is still tracking in the low 50s, and historically line of credit usage should be in the low to mid 60s. Until we see more line utilization this will be a drag on interest income.

Of course we're all watching to see what will happen on the debt ceiling next week. There is still a lot of moving parts, and we certainly can't predict the outcome or fully understand the potential consequences.

The American Bankers Association estimates that the very broad and complex Dodd-Frank bill will add about 5,000 more pages of regulation. Incredible.

Some good changes, and in my view some that will be harmful to community banks. Dodd-Frank will usher in a new risk-based approach to financial service regulation, increased bank supervision, new regulations for systemically risky institutions, heightened focused on consumer protection, and limits on bank investments, among many other things.

While there are still questions about exactly how the bill will ultimately be implemented, there is no question that increased regulation will also add expense to our industry. That being said, as one of the strongest, well-capitalized banks in the Pacific Northwest we are well positioned for the opportunities we expect in 2011 and beyond.

As you can imagine, effective utilization of our capital is an important initiative for us. Having done two FDIC acquisitions in May, we fulfilled a part of our strategic plan to provide select coverage to fill in the market area along the I-5 corridor north of Seattle to Bellingham. However, as you know, these acquisitions do not require the same level of capital as open bank transactions. We feel strongly that the bankers we have brought onto our team have positioned us for growth in new markets and will help us to more deeply penetrate our more mature markets.

We are gaining traction despite a very sluggish economy. Although slow, we are seeing some signs of businesses beginning to make capital improvements to their companies, which should help to improve loan demand and hopefully will see line of credit usage resume more normalized levels.

I am still more optimistic than many that we will see some open bank transactions over the next six to 12 months as the effect of Dodd-Frank continues to roll out and the financial implications of these new regulations materializes, especially as it relates to the technology necessary to monitor and report on these new regulations. I believe there will be a strong business case for mergers to occur.

There is still the complication of the marks on the credit portfolio. But if two prospective partners work together with realistic aspirations, I can see transactions getting done.

One last thing on utilization of capital. We are not feeling pressured to do a deal, simply to do a deal. As always any acquisition, whether FDIC or open bank, still needs to meet our three criteria.

It must first make financial sense. Secondly, it would generally extend our geographic footprint into strategic areas we ultimately want to be in. And third, it must make cultural sense. In other words we must have the ability to grow the commercial business and have strong core deposits to fund loans.

With that, this concludes our prepared comments this afternoon. As a reminder, 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, Suzette, we are ready to open the line for questions.

(Operator Instructions) Joe Morford, RBC Capital Markets.

Good afternoon, everyone. Melanie, relative to your comments last quarter that suggested that the good lending opportunities you saw were limited, given competitive pressures, particularly with some loosening of terms, can you just reconcile that with the more than 5% sequential growth you saw in the portfolio this quarter, and just how that came together?

Sure. I am going to let Mark and Andy chime in here on this. I think that Andy did a good job particularly on commercial real estate, where we were really seeing a lot of pressure on pricing and structure last quarter, reassuring people that we are not putting risky loans on the books.

But I think that the biggest thing is that our bankers are really out there calling and they're becoming very successful. Or not becoming; I mean they are successful. But there is something that is changing in the economic environment, and I will let Mark talk some more about that.

Well, Joe, I think that we continue to have success with our professional lending. All through this latest economic cycle that portfolio has continued to grow.

Our new teams, all of them during the second quarter contributed to our growth. We have had some particular success in the eastern Washington market recently. But up north, down in Vancouver and Portland, all of those areas are seeing some growth.

And that is really a focus of really our commercial lenders out there prospecting and working their pipelines. As Andy mentioned, we have got good credit discipline and we have not relaxed on those things. Perhaps growth might have been bigger if we would have been willing to compromise, but we haven't been.

So we put good solid yields on the books. I would say the only place we have had any challenge continues to be in the consumer portfolio. There just is not demand on the array of consumer products out there.

But we continue to look for opportunities with good consumer clients. So hopefully when that comes back we will be ready to go.

Just in general, how did the pipeline look at period end? And kind of your thoughts or expectations on growth going into the third quarter?

Yes, the pipeline is still good and solid. Again, our folks are continuing to work that. I would say it is down a little bit simply because right at the end of the quarter we had a lot of things that were in the pipeline that actually closed.

So you tend to go up and down a little bit based on the flow of deals through there. But still very strong pipeline, and our production teams are very focused on being out there looking for good quality deals.

Yes, the only thing that I would add, Joe, is we did supplement our organic growth. We purchased about $20 million of loans, commercial real estate loans, that were for sale by other lenders that were companies or credits or projects that we were very familiar with in our footprint. So we did take advantage of that avenue.

Then I would echo Mark's comments that we saw some really nice growth, probably a little bit more than we had anticipated, from some of the new teams. And we may have stole some of the thunder of the third quarter by the closings that we saw in June. Our closings in June were exceptionally strong.

Great, that's helpful. Thanks so much.

Aaron Deer, Sandler O'Neill & Partners.

Hi, good afternoon, everyone. If I may, just following up on Joe's questions with regard to the loan growth in the quarter. Andy, you mentioned too that the ag and fishing contributed to that growth.

I am curious. Can you give any sense of what the dollar volume was that came in this quarter? How much -- or maybe all of that is expected to pay down late in the third or sometime in the fourth quarter, what your expectations are there.

Yes, the ag and fishing component popped up about $16 million from the prior quarter. And I could see giving up as much as a third of that in the fourth quarter.

Okay. Then I guess we covered that. On the credit side then, Andy, the inflows and outflows in OREO, it looked like you had some stuff come in. Not sure if anyone is out there. Maybe you can talk about any sales that you had.

Then also if there is anything in there where you currently have purchase agreements or letters of intent, what kind of pricing expectations you have relative to the current holding values.

Yes, the inflows and outflows on OREO for the last quarter were actually fairly modest. We have actually just gone out to market where we have listed about $17 million, $18 million of our OREO in an auction process. So we are looking to accelerate the resolution of OREO, hopefully in the third and fourth quarters.

In terms of a property-by-property thing, I don't track all the possible purchase and assumptions agreement that we have. So I know we've got a couple million in the works, but they can fall through.

Okay. Then last, Melanie, you mentioned the regulatory environment. Obviously we have got some better clarity now on interchange fees. You fall under the legal cap for that.

But any expectation in terms of what kind of influence that could have at least on competitive pricing for those fees? And can you remind me what the interchange income level is that you do have?

I will answer the first part; and Mark, do you have the second, the answer to the second half of Aaron's question?

Yes.

You know, the Durbin amendment is still so much in flux. Obviously those banks over $10 billion know exactly what the hit is; and they believe that it is going to be about 50%, somewhere between 40% and 50% when you talk to the larger banks.

So, we would have to consider that there could be a potential for that same decline. But it is just really a complicated thing to figure out exactly how merchants are going to differentiate between our card, for instance, at a higher rate than a bank over $10 billion and their $0.22 rate.

So, I think it is a little bit too soon to say that there is going to be a marked decline. But I would anticipate that at some point in time things are going to sort themselves out and that there will be some impact to our merchant card activity.

Mark, do you -- what is our --?

Yes, our annualized -- we would be at about $6 million of interchange income gross. Maybe a little bit more.

All right, great. Thanks for taking my questions.

Matthew Clark, KBW.

Hey, good afternoon, guys. How are you doing? First, on the core margin, maybe, Gary, it was up 11 basis points. Can you break that down for us?

Just because the yields that are in the average balance sheet are distorted, and I think on the deposit site too. Can you just give us a sense for what drove that incremental improvement?

Yes. For the quarter?

Yes. Linked quarter, yes.

Yes, basically for the quarter, I think the largest change for us was on the liability side, you know, [tac] rate and the margin. We went down in our deposits substantially. If you look at our interest-bearing deposits, they declined from last year from 70 basis points to 46 basis points this quarter.

But we have also seen a similar increase in earning assets, especially in our loan yields. So that is driven partially by the accretion, but loan yields going from 5.2% to 5.91% for interest earning assets.

I guess what I was trying to get at was strip out the accretable yield, and hone in on what happened on --

Yes, if you strip out the accretable yield, then the largest change would be on the deposit side.

Okay.

And that would be the 20 basis point pickup that we talked about.

That's year-over-year. But even linked quarter?

Yes, even linked quarter we've had some pickup.

Okay. Then in terms of a willingness to potentially buy back your stock, given that there might not be as much in the way of -- there are deals available but not of size relative to how much excess capital you have. Have you -- can you just update us with your thoughts on potential share buyback and/or a special dividend?

Well, of course we can't comment on anything that hasn't been announced, but I will tell you again that the Board takes capital management very seriously. Each quarter we look at all of the different avenues for effective capital deployment.

The FDIC deals are probably coming closer to an end. They are still -- actually the number of troubled banks in the country has gone up since the first of the year. There are still plenty of troubled banks in the Pacific Northwest. But I agree with you, Matt, that they are going to be a smaller size.

As far as open bank transactions and our ability to deploy the capital, as I said before, I am just a lot more optimistic than many people are that you could get a deal done. So, we are not at the point where we believe that our options to effectively deploy capital -- there are just enough opportunities out there still that we went to continue to look at.

Okay, thanks.

Dave King, ROTH Capital.

Hi. Good afternoon, everyone. A lot of my questions have been answered, but I guess maybe just following up on some of Matthew's questions here. Gary, maybe that yield on just the noncovered loans that was disclosed in the release of 7.32%, do you have what that number was in the prior quarter?

Yes. I don't have that in the prior quarter with me here.

Okay.

Last year --

Is it fair to -- go ahead.

Last year that yield -- we are talking about all loans, was 6.14% last year at this time.

Okay. Okay. That's helpful. Then also then on the margin maybe, it looks like the cash balances were down a lot this quarter. I guess how much of the core margin expansion we saw this quarter would you say was driven by the deployment at higher yields there? Should there be any carry through into next quarter possibly?

Yes, absolutely. We did add some securities, roughly $100 million I believe it was this quarter, a little over $200 million for the first six months. And that will certainly carry over.

We have laddered those securities in, so we -- starting in the beginning of next year. So we have some short-term. And with our interest rate profile we are able to take a little interest rate risk with our liquidity position. So we have some that are out two to three years as well with average life. So, yes, that would certainly continue.

Okay. That's very helpful. Then finally, Melanie, on the traditional open bank acquisition stuff, seeing activity possibly picking up in the next six to 12 months. Can you elaborate maybe on some of the conversations you are having today and what kind of activity chatter there is in the market these days maybe?

Well, I guess the way that I would characterize it, that there are a lot of banks out there that really are or very concerned about the additional expense that is going to be associated with regulations. They are trying to figure out how to apply all of the technology in a cost-effective way, and that is a real challenge.

But there are enough boards out there where you can just sense -- when you're at a conference or something -- that many of them are just tired. I mean they really are thinking about what their options are.

You know, credit mark is probably the thing that makes it most difficult to put deals together right now. But as I said earlier, I don't think that that would necessarily stop two partners who were really realistic about what they wanted to get accomplished, to get something done.

That's very helpful. Thanks so much.

Jeff Rulis, D.A. Davidson.

Hi, good afternoon. The loan growth discussion was kind of beat up, but I guess I am more interested in you guys outlined the underwriting quality of your production. But I guess more interested in the competitive landscape. Particularly on the multifamily side, it seems like there has been a lot of big growth numbers.

Could you speak to what you are seeing from competitors? Is it -- you mentioned it last quarter, but does it seem aggressive in through Q2?

Mark?

Yes, it continues to be very competitive out there. Good, quality assets are hard to find. We see our competitors picking up some things maybe that we would pass on.

We continue to try to be defensive with our own quality credits against pricing issues there. There are different ways we can balance that out.

But clearly I don't see the competitive landscape easing at all. As long as the economy is growing as slowly as it is, people are going to be looking for other banks, good, quality clients, because that is the only opportunity there is out there.

I guess not so much competitiveness, but are you seeing aggressive and/or from your perspective poor underwriting?

Yes.

Okay.

Yes, that has been going on for the better part of a year.

Great, okay. Then I guess one for Andy real quick on the -- you talked about inflows, outflows on OREO. But inflows of $7.8 million in nonperforming loans. How does that compare?

I would imagine it is down from previous quarters. But do you have those numbers for the last -- well, the last quarter, if not two?

Yes, last quarter we had inflows of about $10 million. If you go back to when we were sort of in the peak of the cycle, we were -- towards the end of 2009 the inflows were $30 million to $40 million. Then they declined roughly in the early part of 2010 to around $15 million to $20 million.

And then the last couple quarters have been in the $7 million to $10 million range. So we are certainly seeing a lot less activity migrating downward.

Okay, then one final one for I guess Gary. I was looking at the Other noninterest expense line item. That was down a little over $1 million.

What was the cause there? Is that a one-time item? Or can we bake that in going forward?

Yes, I think in the other noninterest expense line item, you have to remember in the first quarter we recorded that clawback liability. Is that consolidated on your sheet that you are looking at?

Well, that is broken out in Q2 as a separate --

Let me make sure.

You have got that broken out as a separate line item in Q2. I am talking about the $4.2 million in Other?

So this year versus last year, year-to-date?

Not -- sequential quarter. It was $5.3 million in Q1.

Okay, on the line item that I have in Q1, the clawback liability was included in Other last quarter. So this quarter we broke it out, but I think that is your difference there.

So it is maybe half of that $1 million fallout. Was the clawback roughly $0.5 million in Q1?

About $1.7 million in Q1.

Oh, okay. So that was the difference. All right.

$448,000 in the second quarter.

Got it. Okay. That's it for me. Thanks.

(Operator Instructions) Brett Rabatin, Sterne, Agee.

Hi, good afternoon. Interesting pronunciation. Wanted to ask first on the balance sheet, if you continue to move down the liquidity position, if you will be buying more securities. And then if you bought any municipals in 2Q that impacted the tax rate this quarter.

We did buy some municipals in the second quarter. We are trying to manage the cash position to a lower level. But in the second quarter we also brought on some agencies and a small amount of treasuries and some mortgage-backeds.

Okay. Then wanted to ask, just to clarify the goodwill that you ended up booking on the two transactions. Was essentially the loan marks -- did they come in around 30% instead of 22%? Is that the math on that?

Yes, the loan marks -- yes, I mean the loan marks originally, in our original modeling we tried to get into -- some were close to what we experienced on our first two deals with Colombia River and American Marine. We were in -- the mark was somewhere in the neighborhood of 25% to 26%. And on the marks on the Summit and First Heritage deal came in the neighborhood of 35%.

35%? Okay. Then I was hoping maybe for some color. The last two quarters you have given some color around classified assets declining. Maybe I missed it, but can you discuss the trends related to that this quarter?

Yes, we have continually seen our entire watchlist decline since it peaked in September of '09. So again this quarter we saw a decline in that number.

Okay. Then just one last question around the interchange issue. Maybe, Melanie, you can talk about -- you mentioned some uncertainty with how will it affect you.

Can you talk about maybe potential offsets to that? Have you considered your options in terms of other fee structures and whatnot?

Sure. I am actually going to have Mark answer that for you.

Yes, we have been spending a lot of time as this has developed, not just recently but going back last year, and taking a look at alternatives. Clearly we are going to have some other types of things we're going to do to help offset whatever that impact is.

I don't expect to see an impact, though, in our interchange income certainly for the balance of this year, until we really begin to see how some of the competitors unfold that. But we are looking at a number of different options.

We have, you know, trust services, for instance, that we acquired with American Marine Bank. That is going to -- it will be a slow climb, but certainly that is a new service that we have to offer. Our wealth management continues to grow; doing really well.

But if it really would impact us to the extent that you would have to drop down to $0.22, then there is going to be a hole for a while for sure.

Okay, that is great color. Thank you.

There are no further questions in queue. Do you have any closing remarks?

I just want to thank everybody for being on the call today. We will talk to you next quarter if not before.

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