Columbia Banking System Inc (COLB) 2012 Q4 法說會逐字稿

Good afternoon. My name is Wendy, and I will be your conference Operator today. Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's fourth-quarter and year 2012 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. Thank you. I will now turn the conference over to Ms Melanie Dressel.

Thank you, Wendy. Good afternoon, everyone and thank you for joining us on today's call to discuss our fourth-quarter and full-year 2012 results. I hope you have all had a chance to review our earnings press release, which we issued this morning, and which is also available on our website at columbiabank.com. With me on the call today are Clint Stein, our Chief Financial Officer, Andy McDonald, our Chief Credit Officer and Mark Nelson, our Chief Operating Officer will also be available for questions following our formal presentation.

As we outlined in our press release, our fourth-quarter results showed strong loan growth, continued improvement in our credit quality, reduced expenses and increased non-interest income. Clint will begin our call by providing details of our earnings performance for the quarter, and will clarify the improvements we've achieved in our core performance measures. Andy will review our credit quality information including trends in our loan mix, allowance for loan losses and our charge-offs. I will conclude by giving you our thoughts on the economy here in the Pacific Northwest, an update on our merger with West Coast Bank and a brief outline of our strategies as we move forward. We will then be happy to answer any questions you might have. And 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 2011. With that, I will turn the call over to Clint to talk about our financial performance. Clint?

Thank you, Melanie. This morning we announced fourth-quarter earnings of $13.5 million or $0.34 per share. This compares to $14.8 million for the same quarter of 2011 or $0.37 per share. Our reported earnings decreased moderately from the same quarter last year due to the substantial positive impact acquisition accounting entries had on fourth-quarter 2011 earnings. During the fourth quarter of 2011, we had net of tax earnings of $0.15 or $6 million and accretion income on the discounted loan portfolio, compared to less than $0.02 or $664,000 in the current quarter. Another significant item impacting the comparability of the fourth quarters of 2012 and 2011 is the other than temporary impairment charge of $3 million recognized in the fourth quarter of 2011 and recaptured during the current quarter. The combination of these two items, with an increase of $0.10 per share for the fourth quarter of 2011.

We provided a table in our earnings release illustrating the impact of certain accounting entries associated with our acquired loan portfolios. The net effect of our acquired loan accounting resulted in reduced pretax income of $166,000 for the current quarter. This is a reduction of $2.8 million when compared to additional pretax income from acquired loans of $2.6 million for the third quarter of 2012, and a reduction of $12.7 million from the fourth quarter of 2011. I point out the dramatic reduction in the benefit our acquired loan accounting from the prior year because it underscores the $0.04 or 15% improvement in our core performance over the past 12 months. As I've mentioned in the previous quarters, the individual components of our acquired loan accounting entries can change significantly by millions of dollars in some cases, but the net change in the impact to earnings can be relatively inconsequential because of the offsetting nature of many of these entries. It is true that these acquired portfolios by their nature decline over time, resulting in lower amounts of accretion income. However, for portfolios covered by loss-sharing agreements, the amount of the indemnification asset amortization expense will also decline. This is especially relevant for Columbia, because four of our five FDIC deals are covered by loss-sharing agreements.

To underscore this point, during the fourth quarter, we recorded through net interest income, $10.9 million in incremental accretion income on our covered loan portfolios. But we also reduced non-interest income by $9.7 million as a result of the change in our FDIC loss-sharing asset. When contemplating all the entries on these portfolios for the quarter, the pretax impact to income was a reduction of $166,000. This is a good example of why looking at accretion income in isolation will lead to inconsistent conclusions. Tables on pages 3 and 9 of our earnings release illustrate the ripple effect acquisition accounting has to our income statement, and capture the various items that should be considered side by side with accretion income. Our current estimate is that total accretion income on the covered portfolios will be roughly $57 million in 2013 and $40 million in 2014. Please keep in mind these are just estimates and subject to adjustment as expected cash flows on the covered loan portfolios change. While the spread between our reported and operating net interest margin will narrow, a substantial portion of the impact of earnings is mitigated by the decline in the amortization of the indemnification asset.

Our reported net interest margin for the fourth quarter was 5.15%, down from 7.14% for the same quarter last year and 5.52% for the third quarter of 2012. The operating net interest margin, which excludes the additional accretion income, was 4.14% for the fourth quarter compared to 4.4% and 4.44%, respectively, for the third and second quarters of 2012, and down from 4.49% in the first quarter of the year. We spent considerable time optimizing the operating net interest margin during the fourth quarter with a view towards 2013 and beyond. I previously mentioned the prepayment of our Federal Home Loan Bank advances and gains realized in the securities portfolio. In December, we scrubbed our investment portfolio, liquidating and replacing roughly $86 million, or 9% of the portfolio. The majority of the loans sold were fast paying mortgage-backed securities, which due to the prepayment speeds, had negative yields. If all other variables remain constant, the combination of these two items will boost the operating net interest margin six basis points in the coming quarter.

While both of these actions improved the [net], deposit growth and the buildup of cash needed for the closing of the West Coast Bancorp merger continue to drag on the margin. Average deposit growth of $153 million during the fourth quarter resulted in 14 basis points of margin compression. The $265 million in cash required to close the West Coast merger decreases the margin 25 basis points. However, the margin impact of deposit growth and the cash portion of the merger consideration are somewhat interrelated. I separated the impact of the deposit growth because it underscores the quandary our industry faces. We know that attracting and retaining customer relationships is critical to our long-term success, and we are pleased to see the proficiency our bankers exhibit in growing relationships on both sides of the balance sheet. But our low cost of deposits, our growth is adding to incremental earnings, but these earnings come at the expense of softening the margin.

While we have always maintained a disciplined approach to deposit pricing, we fine-tuned our offering rates during the fourth quarter. Our average cost of interest-bearing deposits for the current quarter was 18 basis points, down from 20 basis points in the prior quarter. Our cost of total deposits for the quarter was just 12 basis points, down from 14 basis points in the third quarter. Our biggest opportunity on the funding side will come from the $379 million in certificates of deposit that will mature during 2013. On a linked quarter basis, average interest-earning asset yields decreased 36 basis points to 5.36% during the current quarter, down from 5.72% in the third quarter. The decrease in yield is due to lower interest rates on loan originations and decreased investment yields.

We originated roughly $200 million in loans during the fourth quarter and in excess of $610 million for the year. The average rate on our non-covered loan portfolio was 4.94%, that's down from 5.07% for the third quarter. New loans were originated during the fourth quarter at rates that are about 46 basis points lower than the existing portfolio. The linked quarter decline in loan origination rates moderated from the fourth quarter, dropping 7 basis points to 4.48%, as compared to a 13 basis point decline in the third quarter. The yield on the investment portfolio declined 17 basis points to 3.07% during the fourth quarter, as compared to 3.24% in the third quarter of 2012. The duration of the portfolio at December 31 was 3.63, that's up from 2.77 at the end of the third quarter. CPR rates for our mortgage-backed securities have slowed from the mid-20s and at year-end, are averaging in the low-20s. Still, we expect there will be significant cash flows reinvested over market rates during the coming quarters putting additional downward pressure on the yield of the investment portfolio.

Total non-interest income was $6.6 million for the fourth quarter, an increase of $7.5 million from the third quarter. The increase was due in part to a reduction of $3.3 million in the change in FDIC loss-sharing asset and the $3.7 million gain on investment securities. One of our core performance measures is to compare non-interest income before the change in FDIC loss-sharing assets. On this basis, the fourth quarter experienced an increase of $4.2 million over the third quarter of this year. After removing the securities gains, the linked quarter increase is $500,000, or a little more than 4%. More importantly, this is up $1.3 million or 12% from the first quarter's run rate, driven in part by higher service charges, which increased roughly 8%.

Total non-interest expense was $37.8 million for the current quarter, down from $40.9 million in the third quarter and $39.9 million in the second quarter of 2012. Our run rate for non-interest expense is another core performance measure we track, but it takes some math to arrive at a comparable number. The current quarter includes $649,000 of merger expense, $1.4 million in net benefit from OREO and $154,000 in clawback liability recapture. After taking these items into consideration, our non-interest expense run rate for the quarter is $40 million. On the same basis, the run rate for the third quarter of 2012 was $40.6 million. Compensation and benefit expense and occupancy are the two drivers of the reduced run rate. We look at the fourth quarter of 2012 in comparison to the fourth quarter of 2011, similar improvement in the expense run rate is noted. The run rate for the fourth quarter of 2011 was $41.6 million, $1.6 million or 3.8% higher than the current period.

The continued improvement in our non-interest income and non-interest expense run rate on a linked quarter and prior-year basis is a result of ongoing efforts of our line of business leaders. Through their actions during 2012, we optimized our fee schedules while increasing our realization of accessible fees, fine-tuned our retail staffing model and developed a framework for allocating resources across our various customer delivery channels. In conjunction with these initiatives, we have reduced our FTE count by 50 during 2012, mostly through attrition, and consolidated three branches during the second half of 2012, which will result in additional expense efficiencies for 2013. Lastly, at December 31, our total risk-based capital ratio exceeded 20%, although leverage ratio was approximately 12.8% and our tangible common equity to tangible assets ratio was 13.3%. Prudent management of capital is a priority for us and as 2013 progresses, we will consider all reasonable means of capital utilization. Now, I will turn the call to Andy McDonald.

Thanks, Clint. During the quarter, our non-covered loan portfolio increased approximately $50 million or 2.1%. Growth continue to be centered in commercial business loans and commercial and multifamily real estate term loans. Growth in business loans was centered in healthcare and social services, and finance and insurance. Healthcare and social services growth continues to be driven by our professional banking practices group. The finance and insurance segment is serviced by our commercial bankers, and growth in this segment is being driven by our mortgage banking clients, who continue to originate loans at a record pace, thanks to the low interest rate environment. Growth in commercial real estate term loans was centered in non-owner occupied properties, primarily warehouse properties and multifamily projects and to a lesser extent, some retail product. Commercial real estate construction loans also saw some modest growth, with owner occupied office and warehouse properties driving this growth during the quarter. For the year, the largest growth within the commercial real estate construction segment was in multifamily properties, and within the commercial real estate term portfolio, the largest growth was, again, in warehouse properties.

The area that showed the most growth for the year in our commercial business loan segment were, again, the healthcare and social services sector, along with agriculture, forestry and fishing industries. Growth in the ag and fish markets was a positive $41 million for the year, despite a seasonal contraction in the fourth quarter of $24 million, as our ag lenders continued to have success attracting new business. The growth in business loans was, however, offset by a continued contraction in our residential perm and consumer portfolios, which declined by $4 million and $3 million, respectively. The decline in these segments continues to be driven by consumers refinancing to lower cost conventional first mortgages, which helped out our mortgage banking business, but has negatively impacted our balance sheet.

The covered portfolio continued to contract in the fourth quarter, declining by $53 million before discounts and loan loss provisions, or $38 million net of these items. Problem asset resolution continued to be a big driver in this regard, but we also saw an acceleration during the quarter in portfolio turnover, as many of the commercial real estate clients are refinancing their properties and for various reasons, we don't always retain these clients. Year-to-date, the covered portfolio has contracted by about $220 million, with most of it being problem loan resolution. The balance is some seasonal line usage, along with scheduled payments and a modest amount of portfolio turnover.

Looking at our non-performing assets, we continue to see these decline, and they now represent about 1.08% of our non-covered assets, as of December 31, 2012, down from 1.2% as of last quarter and 2.02% as of year-end 2011. Year-to-date, we've been able to reduce non-performing assets by 43% or $37 million. We are proud of the job our bankers have done over the past couple of years in resolving these troubled assets and strengthening Columbia's balance sheet. NPAs to loans and OREO and OPPO for the quarter also improved, declining from 2.1% to 1.9%. As for each of the portfolio segments, they are as follows. The one to four family perm percentage actually increased from 4.8% last quarter to 5.6%. However, the amount of NPAs in the portfolio remains the same; the ratio only increased because of the bucket decline. Our commercial perm portfolio continues to decline; it was at 2.3% in December of 2012, down from 2.8% in December of 2011. All in all, our term commercial real estate portfolio has held up nicely over the last several quarters.

In the one to four family construction segment, while at 15.3% at year-end 2012, this is much improved over December of 2011, when it stood at 33.9%. While the ratio appears high, in fact, we only have $8 million of NPAs in this bucket. Commercial construction showed the greatest improvement, declining from 19.2% this time last year to 1.4%. And today, we only have one small retail project at about $930,000 that remains a non-performing asset, and this at as that has been placed into OREO and is currently for sale. The commercial business segment showed modest improvement this quarter, as well. Going from 1.2% as of last quarter to 0.9%, and was 1.9% in December of 2011. The improvement in this past quarter was primarily due to loans being placed back on accrual. Our consumer portfolio continues to hold steady at about 1.2% for the portfolio, which has been pretty much the case for the entire year.

For the quarter, the Company made a provision for originated and discounted loans of $2.4 million, down from $2.9 million last quarter and from $4.8 million in a like quarter in 2011. The provision was primarily driven by the level of net charge-offs during the quarter of $1.6 million, and to some extent, the $50 million in originated loan growth I spoke about earlier. For the year, the Company experienced net charge-offs of $14.3 million, compared to total provision for the originated and discounted allowance of $13.5 million. Unless loan growth is significantly accelerates or the economy we significantly improves, we expect our provision expense to closely approximate our levels of net charge-offs going forward. Past-due loans at year end were 47 basis points, down slightly from last quarter, but essentially in the range they have been in all year. So, in summary, it was another positive quarter with our credit metrics continuing to move in a favorable direction, albeit at a modest pace. With that, I would like to turn the discussion back to Melanie Dressel.

Thanks, Andy. While the economic picture here in the Pacific Northwest continues to be a bit bumpy, the overall trend is toward continued positive improvement. The larger metro areas in both Washington and Oregon are recovering faster than the states as a whole, and they're setting the pace in job growth, real estate and other leading economic indicators. Washington state's unemployment rate for December was at its lowest level in four years, falling to 7.6% from 8.5% at the end of the prior quarter back in September, and the unemployment rate for the Seattle, Tacoma, Bellevue area is down to 6.8%. While the unemployment rate continues to improve, some of the declining rate is due to shrinking labor force as people stopped looking for work. During the year, 2012, however, our state gained over 42,000 jobs. The construction sector, which was significantly impacted by the recession, grew faster than any other sector last month and created almost one of every four new jobs in Washington over the year. Construction employment is still about 60,000 jobs, below where it was in December 2007; that's about a 30% drop. Other bright spots were education and leisure and hospitality sectors.

While Oregon's jobless rate remained steady at 8.4%, they added about 2,000 jobs in December 2012. In all, the state gained over 22,000 jobs during the year, although its unemployment rate has hovered between 8.4% and 8.9% for all of 2012, which is above the national average, which was 7.8% in December. The private sector accounted for all of the net employment gains as government employers and manufacturers cut jobs. Oregon's trade, transportation and utility sectors added 2,900 jobs or 2,500 more than economists had expected. Retailers had a good month, adding almost 2,000 jobs during December.

Some good news for both Washington and Oregon employees was the rise in average weekly wages, which was higher than the national average of 1.3%. The signs pointing toward a real recovery in the housing market here in the Pacific Northwest are continuing. The Northwest multiple listing service recently reported that almost 65,000 sales of single-family homes and condos were closed during 2012, improving on the volume in 2011 by nearly 15%. These sales were valued at almost $20 billion, that's nearly 20% from the previous year. In the past year, we have seen decreasing inventory and higher prices in Washington's five largest cities, Bellingham, Seattle, Spokane, Tacoma and Vancouver. While Oregon housing continues to be more challenging than Washington, single-family homes and housing starts are up considerably from the recessionary lows. The state is also seeing prices increase and fewer houses on the market.

The Boeing Company is our region's largest private employer. Last year, they delivered over 600 commercial jets with a market value of about $46 billion, outbuilding and outselling its European rival, Airbus, for the first time in a decade. Despite the flagship 787 Dreamliner planes' temporary grounding, Boeing continues to hire skilled workers to do deal with their backlog for commercial planes. The company is predicting that they will hire hundreds of new production workers, perhaps close to 1,000, to staff assembly lines in Renton, Washington for its current bestselling 737 and one line for its newest variation, the 737 MAX. Boeing will also add hundreds of engineering jobs for the MAX.

Building airplanes is important to our region, but it certainly isn't the only type of manufacturing doing well. In both Washington and Oregon, electronics, fabricated metal, machines, food products and industrial equipment play a big role in the economy. Manufacturing is a surprisingly big player in Oregon, particularly Portland, which has over 100,000 manufacturing jobs, 17th among American metro areas. Nearly 20% of Oregon's state gross product comes from manufacturing, which has been a bright spot for the state, primarily due to Intel and the high-tech industry.

While both the Ports of Seattle and Vancouver, Washington experienced sluggish container volumes last year, down about 8% to 10%, the Port of Tacoma grew about 15% during the same time period. This was primarily due to several new container companies calling on the Port last year, although existing customer volumes also showed significant improvement throughout the year. Non-container or break bulk exports, were the driver behind much of this growth. Expectations are for additional growth of 14% during 2013.

I always mention our military when talking about the economy of our area. The steady growth in military personnel since 9/11 helped sustain our economy during the recession and comped to a $3 billion payroll in Washington state. We are keeping a close eye on possible proposals to reduce ranks over the next seven years or so, although no decisions have been made to date. Local members of Congress have been saying they expect military bases in our state to fare well, as the Defense Department pares its budget. They say forces at the base of South of Tacoma lineup with President Obama's call to shift to Pacific threats as the war in Afghanistan winds down.

As I've shared with you before, most economists believe that the Pacific Northwest will outperform the country as a whole, and we move forward in 2013 and beyond. Despite our ongoing challenges, we believe our diversified export-driven economy here in the Pacific Northwest is a bright spot in the country and gives us an advantage going forward.

I'd like to give you a quick update on the merger with West Coast Bancorp, which we announced back in September. We expect to receive shareholder approval from both companies later this quarter, with a transaction closing soon thereafter. Our strategic plan to integrate Columbia and West Coast is well underway with cross functional teams from both banks playing a central role. We anticipate a smooth transition, and we are eager to welcome West Coast staff and customers to Columbia. Additionally, we will continue to keep our bankers externally focused with the intent to continue to drive loan growth, expand non-interest income and to develop strong relationships with customers and prospects.

Being named as one of the strongest banks in the nation by Forbes magazine in late 2012, as well as number one in Washington and number two in Oregon, has been very beneficial to the development of new relationships. Equally as important will be our focus on improving the efficiency of our Company, with the additional expense and new regulations and cost of compliance looming largely for our industry, it will be even more important to optimize the operational structure of our Company. Having a broader base over which to spread, infrastructure investment should help with this objective.

Overall, we are really feeling optimistic about 2013 and what we can accomplish, despite the continuing challenging economy. In our press release, we also announced in increased cash dividend of $0.10 per common share, which will be paid on February 20, 2013, to shareholders of record as of the close of business on February 6. This is an increase of 11% from the $0.09 regular cash dividend we paid last quarter and represents a dividend yield of 2%. With that, this concludes our prepared comments this afternoon. As a reminder, Clint Stein, our Chief Financial Officer, Andy McDonald, Chief Credit Officer and Mark Nelson, Chief Operating Officer are with me to answer your questions. Now, Wendy, we will open the call for questions.

(Operator Instructions).

Your first question comes from the line of Joe Morford.

Hi Joe.

Hey Melanie, good afternoon. I guess just a couple questions on the loan growth, specifically, on the commercial business side. Did fiscal cliff issues and/or year-end tax considerations have much of an impact on the volumes in the quarter, one way or the other? And separately, was there any increase in line utilization rates that you saw?

Hi Joe. Clearly, there's always year-end issues every year. I'm sure that was a motivation on some of the folks trying to get deals done during the -- at the end of the year, but I wouldn't say that was significant. We have a bit of overlap coming into January, as well, so clearly, those items weren't as critical on year-end. Our utilization rate are off just a little bit in the fourth quarter. I think that's a seasonal impact, and I really don't see much change in that. Overall during the year, we saw our utilization rates improve.

Andy, is there anything you would like to add?

Yes. Some of the utilization rates have declined, and that's primarily driven by some of the activities in the ag and fish portfolios, as those customers are paying down. They won't start re-borrowing until later this year. The fisheries for crab will open up in February; we will start to see that, and of course, the farmers will get more active. But surprisingly, we were not -- we didn't see as many people take advantage of or were concerned about the capital gains issue, in terms of pulling money out of their companies. But we did see an increase in merger and acquisition activity as people just sold their companies.

Right, okay. And just in general, broadly speaking, what are the current thoughts or expectations for organic loan growth in 2013, excluding the acquisition. And is the mix still likely to be more CNI than [CRE]?

I think just to give your broad generalization, Joe, I would say 2013 will be a reflection of what we've seen in 2011 and 2012, just a continuation of that. Our folks are very focused, we've got good pipelines and good prospects out there. So I expect that we are just going to see a continuation of that trend of growth internally --

Okay.

-- aside from the acquisition.

Great. Thanks so much, everyone.

Thanks, Joe.

Your next question comes from the line of Brett Rabatin.

Hi, good afternoon.

How are you?

Good. I wanted to ask, if I heard correctly, the loan portfolio yield declined 13 basis points and the securities portfolio declined 16, and I think there was 46 basis points lower than what you are originating. I was wondering if you could talk a little bit about the pro forma margin and just thinking about your current -- your current margin plus the accrual accounting. Obviously, that's going to be coming through the West Coast, and if there's any updates -- the margin on a going forward basis.

Clint?

Hi Brett.

Hi Matt.

There is a lot of things that I've kind of touched on during my prepared remarks that will impact the margin. Probably the biggest thing that we see, as a headwind for the margin is just the cash that we've accumulated in anticipation of the West Coast closing. I mentioned that's 25 basis points, if everything else remains the same, that's the cost of -- or the impact of the margin of that. We've had great deposit growth, and while it's somewhat connected with the buildup of the cash and the impact of the West Coast deal, at the rates we are bringing it in, a lot of it is in non-interest-bearing. So even in overnight funds, its adding to incremental earnings, but it's impacting the margin, and for the fourth quarter, that was 14 basis points. So, there's a lot of variables.

Loan growth is, obviously -- and our asset mix -- what we do with the deposit funds that come in, closing the merger. I guess with all those variables, I am hesitant to give you a real tight projection on what the margin is going to do. I do think that we had a little bit of catch-up with the rest of the industry experienced in the third quarter. The operating margin was only down 4 bps in the third quarter, and I think that some of that was building later in the third quarter and into the fourth quarter, the early part of the fourth quarter. And then we saw some of those pressures subside as we got into December.

I'm thinking about the way that our deposit growth happened in the late third quarter and early fourth quarter. I'm thinking about what happened with the investment portfolio in terms of prepayments speeds on our mortgage products and what they've done over the last month, actually two months because I've seen what January looks like. So, I feel a lot better about the margins, in terms of going forward, but there's so many variables, I can't necessarily give you an exact number.

Okay, that's fair enough. And then just wanted to maybe get a little color around -- with West Coast reporting today, they continue to shrink their loan portfolio a little bit. I was just curious about your thoughts on getting them more engaged and growing going forward. Then, maybe just any thoughts on timing of expense savings and how that looks, relative to last quarter.

Well, I guess what I would have to say is that that would be a question that you would need to pose to West Coast since we are -- I mean, we can certainly speak to our performance, but I do not sense at all that there is a lack of engagement on their people's part. So, I guess that I would just leave it at that.

Well, I don't mean it quite that way. I meant perhaps, just maybe any color around their portfolio and just -- are payoffs impacting what they are doing, or do you have any sense of that?

Well, all that I know is from what I read in their press release and probably what they showed in terms of line in credit and usage going down to 34% certainly had an impact.

Sure, okay.

I would say that was the biggest factor from what I read.

The second part of your question, Brett, on timing of expense savings -- that's a good point that we should clarify is when we announced the transaction, all of our modeling, we were just assuming a 1231 close for modeling purposes. And with those cost saves, we haven't deviated from those original numbers. But I think it warrants clarifying that the cost saves we really should look at in terms of months one through 12, 13 through 24, as opposed to -- and it just correlated to fiscal year 2013 and '14, because we were assuming essentially, a January 1 date in those projections. So, when we projected 50% cost saves in the first-year, that really builds through Q2 '13 through the first quarter 2014. Then, we would expect it to build into -- starting the second quarter 2014, where we have the full cost saves.

And the integration process is really working very, very well. Mark Nelson from Columbia and Hadley Robbins from West Coast are chairing the integration teams, and they are just doing a great job and the teams are working well together. So, very, very encouraged at the progress that we're making.

Okay. I appreciate all the color. Thank you.

Thanks, Brett.

Your next question comes from the line of Matthew Clark.

Hi Matt.

Hey, good afternoon. On the margin, Clint, maybe -- and I'm not sure if you mentioned this in prepared remarks or not, but with a drag from [courting] cash ahead of the [team] closing of the West Coast deal, we assume that you would get back most, if not all of that 25 basis points in subsequent quarter?

Yes, assuming that the close of the merger is, essentially toward the end of the quarter, this quarter or the beginning of the next quarter, then you'd get that benefit immediately, and it would be sustained throughout the quarter.

Okay, great. And then on TAG, any impact there? I mean your deposit growth continues to remain fairly strong here, I'm just curious whether or not you could quantify or have any sense for whether or not the expiration of TAG had any impact on you guys? In terms of inflows, obviously.

Yes, well I think, to be honest, one of the things that has been very positive, in terms of the public's perception of our strength has been the Forbes lift that I referenced in our prepared remarks. And the fact that even before the TAG program was put in place, we had alternatives for customers who were concerned about insured deposits. So, it has been very positive. It kind of gets back to Clint's comments on deposits today, have kind of a perverse impact on our NIM that will someday change, but deposits keep flowing in.

Okay, and then just on the estimates out there for you all. It seems to be a little bit of a disconnect, relative to the guidance as you originally provided when you announced the West Coast deal, in terms of pro forma estimates. Do have a sense for whether or not there's just some models that haven't been updated to incorporate the deal or just curious how you view the estimates out there, relative to your guidance?

It does look that -- my assumption has been that not everybody has updated their models.

Okay. Okay, thanks.

Thanks, Matt.

Your next question comes from the line of Jeff Rulis.

Hi Jeff.

Hi Melanie. Good afternoon. Clint, a little follow-up. I may have missed the last portion of your commentary on core non-interest expense. You talked about the $40 million level this quarter as core, knocking out a few of those items. Did you say that that can be approved upon going forward? I miss that portion.

I didn't specifically state it in that regard. I guess I was drawing a correlation to it continues to improve. It was down just under 4% from the prior year period, it was down a little bit more from the third quarter; but it's something that we are continuing to focus on. The initiatives that we have in place, one of the things I did mention is as we look at allocating resources across our customer delivery channels, how do we do that in the most efficient manner. Some of the progress we've made in 2012, which resulted in a reduction of 50 FTEs, I could see those initiatives are ongoing; they are part of how we run the bank. So I think that you will continue to see improvements.

So -- but the comments you made were sort of more historical, what the trend line has been up to this point, and then some optimistic view of, perhaps, further improvements.

Right, yes. I wasn't trying to -- I was -- I wanted the highlight the trend line because I think it's very indicative of the work that our Management team has done. I didn't necessarily give any type of guidance, in terms of how that's going to continue to trend.

Any update to the merger cost that the $30 million that you stated previously as you go through this and analyze it further. Is that still a number that you are comfortable as stating -- that seems about it?

It's not going to go up. I don't think it would go up from there. There's still a few variables that we are looking at that could bring it in a little bit under that, but I don't see it going up.

(multiple speakers). We feel pretty comfortable that $30 million is a good goal.

Great. And Melanie, maybe just one last one just on the capital plans. With the dividend announcement this -- today and in terms of -- is it safe to assume no real significant deployment through the close, or still be on the lookout. Any update on the thought process right now?

I would say what I say all the time and excuse me for repeating it, but we look at all different opportunities to deploy our capital effectively, but the close is getting pretty near, so I wouldn't expect any surprises.

Sure, okay. Thank you.

Okay, thank you, Jeff.

Your next question comes from the line of Aaron Deer.

Hi Aaron.

Hey, good afternoon, everyone. I just have three quick questions. One, Melanie, has a date been set for the systems integration, and what is that?

It's not a firm date, but it's -- the conversion itself will occur, we hope in late August.

And the -- it looks like the -- if I followed this right, and forgive me if you discusses earlier, but the FHLB prepaid charge, did that come through the margin and if so, is that about 5 basis points? Is that right?

That came through the reported margin. We excluded it from our operating margin calculation and, yes, on the reported margin, it's 5 basis points.

Thanks, Clint. And then Andy, the TDR balance that's not included in your [MTA] total, do you have that number?

I don't have that on me.

All right. Thanks, guys.

Sorry.

No, that's all right. Have a good afternoon.

Okay. Thanks, Aaron.

(Operator Instructions).

There are no further questions at this time.

Well, great, and thanks everyone for joining us on the call. We apologize for the coughing and our voices. Whatever is going around, it seems like we all have today. So, thank you and we will talk to next quarter.

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