Columbia Banking System Inc (COLB) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking System Second Quarter and 2013 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 Instruction) 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, Brandy. Good afternoon everyone and thank you for joining us on today's call to discuss our second quarter results. I hope you've all had a chance to review our earnings press release, which we issued earlier this morning and the release is also available on our website, columbiabank.com.

Our financial results now reflect our acquisition of West Coast Bancorp, which was completed on April 1. As we outlined in our earnings release, our second quarter results show the impact of that acquisition, as well as strong organic loan growth and an increased operating net interest margin. Clint Stein, Columbia's Chief Financial Officer is on the call with me today. He will began 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 McDonald, our Chief Credit Officer will also be speaking this afternoon. He 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 the ongoing integration of West Coast Bancorp and a brief outline of our strategies as we move forward. We'll 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 with the SEC for the year 2012.

And with that I'll turn the call over to Clint to talk about our financial performance.

Thank you, Melanie. This morning, we announced second quarter earnings of $14.6 million or $0.28 per diluted common share. Our reported earnings were impacted by $9.2 million in pretax, acquisition-related expenses, resulting from the West Coast transaction, which lowered earnings per diluted common share by $0.11. Reported earnings were also affected by a negative $3.2 million or $0.04 per diluted share, related to the accounting impact stemming from our FDIC acquired loan portfolios. However, much of the negative impact of the FDIC loan portfolios was offset by a net benefit from OREO of $2.8 million or $0.03 per diluted share.

Given the significant influence the West Coast acquisition had on our financial results, prior period comparisons are not going to be very meaningful this quarter. To assist you in evaluating this impact, we included a table in our earnings release summarizing the fair value of net assets acquired. After one quarter, we are still comfortable with our original modeling, which projected EPS accretion of 20% in the first year and 33% in the second year. Previously, we've stated our expectation of $30 million in acquisition-related expenses. To date, we have incurred a little over $11.7 million. The actual level of acquisition-related expenses will become clear over the next two quarters, as we wind down the integration process. At this time, I don't see these expenses exceeding $30 million, but I do expect the third quarter acquisition-related charges will continue to be elevated, followed by a substantial trail-off in subsequent quarters.

We continue to make significant progress on the realization of projected annualized cost savings with 93% identified and 40% implemented. The majority of the remaining cost savings will be realized shortly after our core system conversion, which is scheduled for late August.

During the second quarter, we booked an estimated $9.6 million in discount accretion on the West Coast loan portfolio. Of this amount, $6.7 million reflected normal accretion, with the remaining $2.9 million coming in from payoffs and prepayment activity. The operating net interest margin improved 13 basis points from the first quarter to 4.34% and is up 20 basis points year-to-date. The improvement in the operating NIM is the result of deploying overnight funds in the acquisition of West Coast. Since the beginning of this year, we have reduced overnight funds by $351 million.

Our average cost of interest-bearing deposits for the current quarter was 11 basis points, down from 16 basis points in the prior quarter. Our cost of total deposits for the quarter was just 7 basis points, down from 11 basis points in the prior quarter. The decline was a result of our continued efforts to fine-tune our deposit pricing, particularly in the [typical] deposits and public fund sectors. Our cost of total deposits also benefited from West Coast deposit base, which coincidentally had a cost of total deposits of 7 basis points in the first quarter of this year.

On a linked quarter basis, average interest earning asset yields increased 15 basis points to 5.33% during the current quarter, up from 5.18% in the prior quarter. The increase in yield was driven by the accretion income from the West Coast loan portfolio.

We originated $190 million in loans during the second quarter and just over $370 million for the first half of the year. The average rate on our originated loan portfolio during the quarter was 4.72%, down from 4.84% in the prior quarter. Subsequent to closing the West Coast transaction, the investment portfolio contracted 6.6% or $118 million, as the second quarter progressed and loan growth accelerated. Yield on the investment portfolio declined 86 basis points to 2.11% during the second quarter, as compared to 2.97% in the first quarter. The decline was the result of bringing the West Coast portfolio under our balance sheet at current market yields, resulting in $3.1 million of additional premium amortization during the quarter. The duration of the portfolio at June 30 was 4.1 years, up from 3.97 years at the end of the first quarter. The increase in duration was driven by slower forecasted MBS prepayments. The CPR for the mortgage portfolio during the second quarter was just under 24, down from roughly 30 in the first quarter.

Total non-interest income was $6.8 million for the second quarter. We have previously stated that one of our core performance measures is to compare non-interest income before the change in FDIC loss sharing assets. On this basis, the second quarter experienced an increase of $7.8 million over the first quarter of this year. The increase is largely due to the West Coast acquisition. However, after removing the change in investment securities gains, we did experience 2% growth in non-interest income during the quarter, when compared to the sum of Columbia and West Coast individual first quarter performance.

Total non-interest expense was $64.5 million for the current quarter. Our reported non-interest expense was skewed by previously mentioned $9.2 million in acquisition-related expense for the quarter, which was partially offset by $2.8 million in net benefit from OREO. After taking these items into consideration, our non-interest expense run rate for the quarter is $58.1 million. We expect to see this run rate continue to trend downward as we complete the West Coast integration.

Our effective tax rate for the quarter was 33.7%, up considerably from 28.8% in the first quarter of the year. The increase in the effective tax rate was driven by the projected additional full-year pretax income, resulting from the West Coast acquisition, a higher tax apportionment factor for the State of Oregon and the non-deductible nature of certain merger-related expenses. We expect our full-year 2013 effective tax rate to approximate our current year-to-date rate of 31.6%.

This morning, we announced a cash dividend of $0.10 per common share and per common share equivalent for holders of preferred stock. The dividend will be paid on August 21, 2013 to shareholders of record as of the close of business on August 7. The dividend represents a payout ratio of 36% of our second quarter earnings.

And now, I will turn the call over to Andy McDonald to talk about our credit metrics.

Thanks, Clint. As we've been discussing, the recent acquisition had a material impact to our financial statements, including the addition of $1.4 billion in loans. However, the loan portfolio remains well diversified. In fact, in terms of mix and concentration, it looks very similar to what it looked like before the acquisition.

Certainly, commercial real estate perm loans remain our largest asset class, increasing from 42% of non-covered loans to 48%. The mix, though, between owner-occupied and non-owner occupied remains the same, with non-owner occupied commercial real estate perm loans comprising 59% of our total commercial real estate perm loans. Obviously that means owner-occupied comprises the balance of 41%.

Looking at it by product type, we do see some changes with office and retail now representing the two largest segments at 19% and 16% respectively. Warehouse, which used to be number one, is now our third largest concentration and manufacturing and industrial properties is in the fifth spot, which used to be hotels and motels.

Commercial business loans now comprise 37% of our non-covered loan portfolio. Looking at commercial business loans by industry and comparing it to this time last year, so seasonal effects can be factored in, we see that agricultural, forest and fishing remains the number one at 16% of commercial business loans, followed by healthcare, finance, construction and manufacturing, exactly the same order as a year ago. So our loan portfolio remains well diversified and we continue to make the same types of loans as we did before, again, attesting to the similar cultures, which have now come together.

During the quarter, our non-covered loan portfolio increased approximately $141 million or 5.4%. This is consistent with the level of growth we saw last quarter. Total originations for the quarter were about $190 million and we saw good activity across the entire footprint. The covered portfolio continued to contract, declining by $38 million before discounts and loan loss provisions, or $24 million net of these items. During the quarter, we resolved approximately $15 million in problem loans, before discounts and loan loss provision.

As detailed in our press release, non-performing assets were approximately 1% of our non-covered asset, up slightly from 0.99% last quarter. The increase was primarily due to the non-performing assets acquired in the West Coast transaction. If we adjust the ending balance for the first quarter, thus including the West Coast balances, we would have begun the quarter with approximately $79 million in non-performing assets. Looking at the ending balance for the quarter of $68 million, indicates that we were able to reduce NPAs by $11 million during the quarter or roughly 14%. I would note that $1.8 million of the $11 million reduction in NPAs was due to charge-offs. Again, you can see the detail on our press release.

NPAs to loans and OREO and OPPO for the quarter declined from 1.7% to 1.6%. Looking at the individual asset classes, the impact of the West Coast transaction certainly had an effect on a few of them. For our one-to-four family perm portfolio, approximately 5.3% of this portfolio is non-performing and remains even with where it was in March. Essentially, the addition of West Coast doubled the size of the portfolio and also doubled the size of the NPAs in it.

Our commercial perm portfolio for real estate saw a decline from 2% to 1.4% and much of this was due to the addition of the West Coast Bank portfolio, as well as some asset resolution within the legacy portfolio. One-to-four family construction actually saw a negative migration, because this moved from 13.1% of NPAs to 22.8% and this was solely due to the addition of West Coast Bank assets. Commercial construction saw a slight increase from 1.4% to 1.8% and again, this was due to the West Coast acquisition. Commercial business loans remained even at around 1%. So the portfolio remains relatively stable. We have just over $15 million of commercial non-performing assets.

The consumer portfolio also remained relatively stable, with about 1% of it being non-performing or roughly $4 million. As of the end of the quarter, we also had approximately $12.8 million in recorded investment in TDRs, of which $1.8 million is included in our non-performing asset category, which of course means we have $11 million in performing TDRs.

For the quarter, the Company had a provision for originated and discounted loans of $2 million, compared to a recapture provision of $1 million last quarter and $3.8 million for the same quarter last year. The provision was associated with our originated loan portfolio, in which we experienced approximately $2 million in net charge-offs. Thus, the provision essentially matched the level of net charge-offs associated with that portfolio. Including recoveries in our discounted portfolio, net charge-offs for the quarter came in at $1.4 million, as no provision was recorded for the discounted portfolio. Past due loans at quarter-end were 47 basis points, essentially even with last quarter when there were 48 basis points.

In summary, we are feeling good about the direction the portfolio is moving and the addition of the West Coast Bank loans fits well with our desire to maintain a well diversified loan portfolio. And now I'll turn the call back over to Melanie.

Thanks, Andy. Now, I'd like to spend just a few minutes in bringing up to date on our view of the economy and the footprints in which we do business. While the road back to full economic recovery continues to be a bit bumpy, we're seeing continued improvement with Washington State still outpacing the United States as a whole and Oregon's economy showing steady economic growth, pointing to sustained expansion.

As I mentioned before, our major metropolitan areas here in the Pacific Northwest are recovering significantly faster than Washington and Oregon as a whole. The populations of both the Seattle and Portland metro areas continue to grow. The City of Portland grew 3.3% from 2010 to 2012 and Seattle grew 4.3% during the same time period. The improving trend is reflected in the employment picture of both states.

In Washington, the jobless rate last month held steady at 6.8%, the same as in May of this year, but well below the 7.6% of the country as a whole. However, more people entered the labor force and the private sector added almost 16,000 jobs in June, twice as many as in May. Washington has now added back 84% of the jobs lost during the recession and the Seattle metro area has actually recovered 99% of the almost 124,000 jobs lost in the recession. Washington also had the fifth highest job growth in the United States from May 2012 to May 2013, most notably in the technology and Internet-related sectors. The most significant increase was in construction, which added over 4,000 jobs. Other fast-growing sectors were professional and business services, leisure and hospitality, as well as education and health services. Government employment continues to trend down, with a loss of about 5,900 jobs.

Oregon has also added jobs last month, although its unemployment rate was also essentially unchanged from May, picking up just slightly to 7.9% in June, as more people started looking for work. The state added about 4,700 jobs, primarily in the leisure and hospitality and professional and business services sectors. The University of Oregon Index of Economic Indicators Report continues to point towards further improvement in the state's economy, as the year progresses, with growth expected to accelerate later in 2013 and into 2014. In addition to improvement in employment, particularly in construction, the University cites improved consumer sentiment and manufacturing orders boosting the Index, which hasn't lost ground for over eight months now.

The recovery in housing is continuing in the Pacific Northwest, especially in our largest metropolitan areas. The markets are performing well and we're seeing very low inventories of unsold homes, which is quickly driving up prices, encouraging new construction and creating new jobs.

While the Port of Seattle continued to experience sluggish container volume, the ports of Tacoma and Portland are seeing increased volume. Container volumes at the Port of Tacoma, in particular, are continuing to outperform 2012, up almost 17% in May 2013 from the prior year. And from January 2013 through the end of May, volumes were up 31%, primarily due to the presence of the Grand Alliance container shipping consortium, which moved to Tacoma from Seattle last July. The increases were largely due to higher demand for automobile imports, agriculture and wood products to export and electronics. Expectations are for additional growth during the rest of the year.

We are also happy that Boeing 787 Dreamliners are back in the air after making modifications to the batteries. As I mentioned last quarter, The Boeing Company, our region's largest private employer, has announced some relatively modest job cuts, as its latest Jet program shifts from development to production. Boeing continues to project that commercial market for aircraft will have an annual growth rate of about 4% over the next 20 years and they had a record $410 billion in reported order backlog.

As I've mentioned before, the military is a very important economic driver in Western Washington. Employing more than 91,000 people in the region, the military provides more than a $3.1 billion annual payroll and local sales associated with the military employment are estimated at nearly $24 billion. Last month, however, the army announced their plans to cut active duty soldiers by about 4,500 over the next few years by eliminating a Stryker Brigade.

To summarize, the trend is for a steadily improving economy here in one of the fastest growing parts of the country. So, along with most economists, we believe that the Pacific Northwest region will continue to outperform the country as a whole. In order to take advantage of the strengthening economy, we must be externally focused and I'm very pleased with how our team has engaged with both, prospective and existing customers to make sure there's no doubt in anybody's mind that we have money to lend. This is the reason for our loan growth.

The integration of the former West Coast Bank into Columbia has gone very smoothly and we're right on track with where we expect it to be in that process. The cross-functional teams have done an extraordinary job of executing on the integration plan, [plus] many of the system conversions to occur during the third quarter. Of course, we will still have a couple of quarters impacted by merger-related expenses. However, we will continue our focus on improving our efficiency ratio, as we work through the final phases of the overall integration. On the other side of the equation, we will continue the emphasis on maximizing non-interest income, as we introduce customers to the products and services our newly combined company offers.

Next month, we will be celebrating the 20th anniversary of Columbia Bank. We've been able to accomplish a lot over those 20 years, but we truly believe that the best days are still ahead for our Company.

And with that this concludes our prepared comments this afternoon. As a reminder, we have Clint Stein and Andy McDonald with me to answer questions. And now, Brandy, would you open the call for questions, please.

(Operator Instructions) Aaron Deer, Sandler O'Neill.

Hi, Aaron.

Hi, good afternoon, everyone. It was great to see that you're continuing to see some strong organic growth this quarter and I was wondering if you could give us some details in terms of where that came by both type and geography and what the pipeline is looking like, as we head into the third quarter here?

Sure. Andy, would you like to take that?

Sure. In the C&I portfolio, we continue to see traction in the healthcare area. And again, we have a fairly strong presence with dentists, orthodontists, primary care providers, and then we also do fairly well clinics that are associated with hospitals. So we continue to enjoy growth there. We've also seen, as Melanie discussed, an uptick in construction-related assets, as both the housing market has certainly begun to rebound and we're starting to see commercial now have some positive -- the light at the end of the tunnel there, I think, for commercial construction is certainly visible. And so, we saw construction balances also increase.

Within the CRE portfolio, a little bit more modest growth there. But we continue to see some multi-family activity, a little bit or retail, but the large part of the growth in the quarter was actually in our owner-occupied portfolio, which is principally warehouse and industrial properties.

And the pipeline continues to be strong and I think that one of the biggest parts of the story is, we're seeing nice growth and nice opportunity throughout our footprint.

And just given that we're hearing from a lot of banks that we've been talking to over the course of the quarter that there's still not a ton of loan demand out there and some banks are clearly having trouble growing their books. How is your success? I'm wondering if that's related to pricing. How are you pricing relative to customers? Are you just not seeing quite the level of competition that we're hearing about elsewhere?

Well, I'm not hearing that there is less competition. I think that we've been very focused on the kind of business that we're looking for. And Andy is welcome to jump in here and answer as well. But I really do think that the reason why we're seeing the growth that we are is, throughout the recession and the recovery, we have really made it a good point to keep everybody out, making calls, calling on their existing customers, calling on their prospects and just developing the kind of relationships that result in loan opportunities.

I would say that there has been certainly the pressures on pricing in the C&I space has been greater than the commercial real estate space, simply because it has a shorter duration, shorter life. I think banks are willing to get a little bit more competitive. Our originations are probably down 25 basis points to 30 basis points from where they were several months ago, but we're coming in about LIBOR plus 75 in terms of the C&I stuff. But when you throw the floors in, [RACs] are getting in about [3.25 to 3.50], because obviously the floors provide us some protection.

The CRE assets, we never have gotten overly aggressive there, which is -- it sounds really [odd to me] there, because we're still originating loans in the low-fours and that seems aggressive. But we have seen our competitors go sub-four. We just haven't chosen to do that yet. We're probably a little less aggressive, as we sit here today, on originating more long-term fixed-rate CRE loans.

That's very helpful. Thanks, and good luck with the systems integration.

Thanks, Aaron.

Matthew Clark, KBW.

Hey, Matt.

Hey, good afternoon, guys. I missed the beginning of the call. So I apologize if you talked about this, but in terms of accretion, both on the covered and on the acquired, can you give us an update on what to expect out of the covered portfolio over the next year and -- I think this year and next, as well as how the accretion on the acquired book might trend over time?

Clint?

Well, the accretion is trending downward. Last quarter, I think, I gave some commentary on what we expected in terms of accretion for the full year 2013 and then looking forward into 2014. Those numbers were roughly $55 million for the full year of 2013 and $38 million for 2014. Those haven't really changed at all. They are subject to change, as we re-yield and re-cashed our cash flow expectations each quarter. But after going through that process in June that didn't really change subsequent years on out. It's going to continue to trend downward, probably at a same percentage rate, just because the portfolio continues to wind down.

In respect to the West Coast portfolio, it's a little preliminary to really get a good feel for where that's going to be long-term. The amount that we have in for the current quarter is provisional. We finalized our day-one valuations at the end of the quarter. And so, as such, we had to apply an estimate. We feel really good about that. But that was comprised of, I believe I said in my prepared comments, $6.7 million was what we attributed to normal accretion and $2.9 million was the result of payoffs and prepayment activity that occurred during the quarter. So that's really the wild card, is what do we have in terms of prepayment. Absent that, $7 million was what we had for run rate in the second quarter.

Okay, all right. And then on the expenses, it looks like, you correct if I'm wrong, but I think West Coast had a $19 million run rate going into the deal closing. And if you strip that out, it looks like your legacy expenses were down a couple million. Can you give us an update there, whether or not you extracted anything from West Coast yet and what you might be doing with legacy COLB?

Yeah. The thing that you have to keep in mind is that at the time that we did the modeling and we came up with our 25% cost saving estimate, that estimate was $20.9 million. So, by default that gives you an annualized run rate for West Coast of just over $83 million. They did some things to work on their efficiencies in between the time of the announcement of the merger and the time it closed, as we did. And we continue to work on our core expense run rate on our side, the legacy Columbia piece.

So, I guess, long term, where we were looking at is a run rate of about $55 million. We were $58 million, see what that number was, $58.1 million, if you back out the headwind from the merger expense and the tailwind from the OREO benefit that we had. So I feel really good about where we're at in terms of the progress we're making. We've identified the vast majority of where the cost saves will come from and the implementation. We continue to make progress everyday and right now, we're at about 40% in terms of actual cost saves implemented. And it's kind of difficult to push that back into the second quarter and give you the benefit, because -- the exact number, because it's something that -- as each day passes, we continue to make progress on those and some of it may come in, in stages. And the next big wave of realized cost savings will be after we complete our core system conversion, which is just a little under a month away.

Okay. And then the last one, just on the OREO gains there. I mean, you've had gains for the last four, or five quarters. Should we get used to that here going forward or is it not something we should assume? I mean, are valuations that much better and you've written it down enough that we could continue to see gains?

Well, if you look at some of the detail in the press release, the OREO gains are primarily centered in the FDIC-assisted portfolio and the basis in those assets just happens to be lower than the market value of the real estate. So we've been enjoying fairly consistent gains there. But if you also look at the detail in the press release, you'll see that the size of that OREO portfolio is contracting. So I'd be hesitant to continue to model something at the level that we've historically enjoyed.

Okay, got it.

Jeff Rulis, D.A. Davidson.

Hi, Jeff.

Hi, Melanie. Question on the loan production. I don't know if it's possible to delineate what portion of growth came from the West Coast platform, if you have any commentary there?

Yes. We originated about $190 million in the quarter and $30 million of those originations came out of what we might call the old West Coast footprint. All in all, during the course of the quarter, the West Coast loan portfolio remained flat and we sort of see that as a victory, because their prior experience for several quarters was that portfolio was contracting. So we really think that the bank was down, and that footprint has done just an excellent job of staying focused on their customers, staying focused on their prospects, and really selling the value proposition of the combination of the two banks.

And then, Melanie, any clarity on sort of capital management going forward, I guess, post close, and maybe some clarity on Basel, if anything has changed three quarters later for you?

We still have a lot of discussions around capital management and what we want to do into the future. Certainly, all of the different ideas in capital management are things that we discuss, whether it's another acquisition or a change in dividends or things like that. So, obviously, no news. And as for Basel III, that just continues to be a moving target. And even though they came out with the preliminary guidance on that, I think it was this week, maybe this last week. I still don't feel as though there is a lot of clarity. Last time that we ran the numbers, it did not have an impact, a negative impact on us. I don't believe that we have rerun that based upon the new information and with West Coast. But there's a lot of gray area right now, just around what levels of capital banks are going to be required to have, and I wish that I had the answers on that.

And the current TCE, I didn't calculate it. That was like around 9.3, is that correct?

I think it's -- yes, it's going to be a little under 9.5.

Okay, okay.. And maybe, Clint, one quick one on -- just on the margin. I don't know if it's -- if you could quantify maybe the basis point benefit from putting that cash to work, strictly from the West Coast purchase I suppose? In other words, up 13 basis points sequentially, but what of that was attributed to just straight putting that cash to work, if possible?

Yeah. I don't have that -- I haven't done that math exercise yet. I know at the end of the fourth quarter, when we looked at just the impact of just the cash portion of the merger consideration, it was going to be about 25 basis points to the NIM. But we fine-tuned our cash position early in the first quarter and pre-invested some cash flows and we did this repositioning a part of the investment portfolio at the end of last year and the first part of the first quarter.

So there's been a lot of things that we've done to put ourselves in a position to enjoy a little bit of expansion in the NIM. And, I guess, I haven't taken the time to refresh those numbers as it relates directly to this quarter.

Okay. And, I guess, more specific -- I mean, assuming that you don't have that lever to pull going forward, I guess, the commentary on margins is that's a flattish type environment, or still fighting some pressure?

Well, I think that we'll still have potentially some pressure until the short end of the curve starts to move and we start getting some movement in our loan rates that are tied to the short end of the curve. We're getting some relief in terms of premium amortization in the investment portfolio, as things have slowed down there. So I think really the outlook, we'll continue to have loans repricing. We -- just the average note rate on our originated portfolio is [4.72]. We're originating things at a lower rate than that. So, by default that would indicate that we're going to have some additional margin pressure. A lot of it in terms of being able to counteract that depends on are we able to continue to enjoy the loan growth that we've had for the past several quarters and if we're able to take cash flows coming out of the investment portfolio and put them to work in the loan portfolio. Then I think that the margins stays flat. If that's not the case, then I think it gets pressured.

Okay, thank you.

Thanks, Jeff.

Joe Morford, RBC Capital Markets.

Hi, Joe.

Hi, everyone, good afternoon. I guess, most of my questions have been asked, but just to follow up on a couple things. One, just on that last point, in terms of the outlook for the investment portfolio, should we expect that just then to continue to decline and basically proceeds be used to fund loan growth to the extent that's possible or are you doing anything different, given some of the steepening in the yield curve we're seeing?

So far we've been -- with the timing of the loan growth that we had, we've just been letting the portfolio contract. Also, one of the things that we talked about last quarter and came to fruition this quarter was we selectively repriced some public funds and we saw those go back to the state government pools. And so we back-filled some of that deposit runoff with contraction in the investment portfolio.

So we really haven't -- I guess, to your question, since the run-up in the longer end of the curve, we haven't really been active in doing anything with the investment portfolio.

Okay, makes sense. And then, I guess one other follow-up, probably Aaron's question was -- and maybe I missed this, but did you comment at all about line utilization rates in the C&I portfolio? Have they up-ticked all, given what sounds like your markets are a little stronger than most?

Line utilization remains in the mid-50% range. It's up a little bit, but it's really just due to the seasonal impact of what occurred in our Ag portfolio.

Okay. Thanks very much.

Thank you, Joe.

Brett Rabatin, Sterne Agee.

Hi, Brett.

Hi. Good afternoon. Melanie. Wanted to first ask you, I think last quarter you become a lot more optimistic on the economy in your markets, vis-a-vis, maybe the end of last year and you gave a lot of economic data. But, I guess, I was just curious about your thoughts on the pace relative to what you were seeing in the last quarter in terms of the economy and if you think it's accelerated or kind of flattened out in terms of performance of growth and whatnot?

I continue to be really pretty optimistic. And I think that we're just seeing a gradual pickup in the speed at which the economy is growing. It's nothing world shattering, but clearly I feel as though there's good stabilization and good opportunity for future growth. And a lot of that has to do with just the number of people that have re-entered the workforce and looking at how many new jobs have been created, in particular, in the metro areas. The only thing that is kind of a wild card out there right now, in my estimation, is what's going to happen with the decline in military spending. Obviously, that's going to impact the basis in our part of the world. But also Boeing, they are big defense contractors as well. But I don't think that we're going to see anything that is going to cause the economy to come to a hold in terms of that growth. I feel really good about it right now.

Okay. And then the other thing was, maybe I'd missed it. I don't know you talked some about the amortization on the acquired securities, but I missed it, if you gave it, the interest reversal on the non-accrual loans in the quarter. And then just any thoughts on sort of the West Coast portfolio, kind of post to close, you obviously had really strong growth in 2Q to know if there was any [launch], maybe you decided that were not the kind of -- quite as you were wanting, so didn't know if there would be any kind of pull-back from what you acquired during the quarter?

Let's start off with the first part of that question. This is Clint. In terms of the premium amortization on the West Coast portfolio that was $3.1 million and the interest reversals were $145,000.

Okay, so pretty minimal.

Yeah, yeah. The interest reversals essentially are 1 basis point -- one basis point add-back to the operating NIM.

Okay.

I think in terms of the portfolio, as I was trying to talk about in the prepared comments is, we're really happy with the mix and the types of loans that they have. We think they're very complementary to the mix and type that we were pursuing before the transaction close. So we are not contemplating any portfolio sales at this time.

Okay, great. Nice (inaudible) closing the deal.

Thanks, Brett.

(Operator Instructions) Jacquelynne Chimera, KBW.

Hi, Jacquelynne.

Hi, Melanie. I just wanted to touch on some of the borrowings, so probably a question for Clint here. I know you said (inaudible) borrowings were up in the quarter and I just wanted to see how that played out with the payoff from Columbia and if you still had the $50 million in there and what may have been added during the quarter -- from West Coast, not Columbia, sorry?

We paid off -- I think it was about $78 million at the time that we closed the West Coast transaction. The remaining amount was, they all had maturities in 2013. We had some that matured in June. Off the top of my head I don't recall specifically how much that was. But in terms of the borrowings that you're seeing at quarter end, a lot of what we were able to do during the quarter that really helped the margin is try to manage our overnight funds close to zero. And so, what that means is that over the course of, say, a month or a quarter we're going to be able to do that. But just with the normal course of business there is variability in your cash inflows and outflows and so that puts us in a short-term borrowing position from time to time. And other times, we might be selling funds.

So we did have some additional borrowings. And then also we have to maintain $40 million to $50 million just in our Fed account, just through the normal fluctuation of our daily transaction volumes. So that's what you're seeing there. It's just we're able to manage our overnight funds much tighter than what we were, as we led up to the acquisition.

Okay. So, just shorter-term, then in (inaudible) it's just a cash management tool?

Exactly. Yeah, they're bouncing between overnight and seven days. You get a substantial reduction in the charge if you take a seven-day advance. So we have a couple of those.

Okay. Looking at the $3.1 million in premium amortization, is that something that will be ongoing each quarter or is a portion of that due to just rate movements and where their portfolio wound up pricing from a fair value point of view?

I think the answer is both. If you look at April 1, it was kind of the bottom of the market from an investment portfolio yield standpoint. And so, when we fair valued their portfolio at April 1, in order to get the yields down to what would be a current market yield, it resulted in pretty high premiums. So this is the effect of that. It's similar to -- I guess, the way we view it, it's similar to the accretion income on the loan portfolio. It's just that this one lowers the yield and the accretion income on the loan side increases your yield. So it will be ongoing as long as those bonds are still part of our portfolio. There will be some sort of day-one premium assigned to those. And their portfolio is very similar to the Columbia portfolio and I think the duration on it was about 3.6. So it's going to be around with us for a while, but it will diminish as time goes on.

Okay. And then just one last one. Just if you have a general breakout, it doesn't need to be anything too specific, but where is the $9.2 million throughout the various non-interest expense items fell?

Sure. About $3.4 million in compensation, $411,000 in occupancy, roughly $500,000 in advertising, $3.5 million in legal and professional, $435,000 in data processing and then about a $1 million just in other various categories.

Great. Thank you. That's incredibly helpful. And everything else I had was already answered. So thank you very much.

Thanks, Jacquelynne.

(Operator Instructions) There appears to be no further questions at this time.

Thanks, Brandy, and thanks to all of you for joining us on the call today and we'll talk to you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.