Heritage Financial Corp (HFWA) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you so much for standing by and welcome to the Heritage Financial earnings conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, President and CEO, Mr Brian Vance. Please go ahead.

Thank you, Kathy. Appreciate it. Like to welcome all that have called in this morning and those that may be listening later in a recorded version. Attending with me and participating with me this morning is Don Hinson, our CFO. Our earnings release went out this morning before market opened. Hopefully you've all had an opportunity to review the release prior to the call. Obviously, we'll be referring to the release as we work through our discussion today.

I'd like to have you refer to forward-looking statements and the recent press release and just for the record, I will read very quickly our forward-looking statement comment. Statements concerning future performance, developments or events, expectations for growth and market forecasts, and other guidance on the future periods constitutes forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from stated expectations. Specific factors include, but are lot limited to, the effective interest rate changes, risks associated with acquisition of other banks and opening new branches, the ability to control costs and expenses, credit risks of lending activities including changes in the level and trend of loan delinquencies and write-offs, changes in general economic conditions, either nationally or in our market areas. These factors could affect the Company's financial results.

You should not place undue reliance on forward-looking statements and we undertake no obligation to update any such statements. The Company does not under take or specifically -- and specifically disclaims any obligation to revise any potential forward-looking statements to reflect the occurrence of anticipated or unanticipated events, or circumstances after the date of such statements. Additional information on these and other factors are included in the Company's filings with the Securities and Exchange Commission.

I'd like to start with some highlights of our third quarter. Diluted earnings per common share increased to $0.12 for the quarter ended September 30, from $0.11 in the prior quarter ended June 30. Cash dividends declared in the amount of $0.05 per share. Originated loans increased $20.4 million during the quarter ended September 30. Non-interest bearing demand deposits at September 30 increased to 18.9% of total deposits, compared to 17.5% at June 30. We initiated a repurchase program of approximately -- up to approximately 782,000 shares, of which, 69,300 shares were repurchased during the quarter ended September 30. Common stock warrants were issued to the US Department of Treasury pursuant to the TARP Capital Purchase Program were repurchased for $450,000 during the quarter.

Speak just briefly to earnings. We posted a Q3 net income of $1.84 million, or $0.12 per share, which was an increase from Q2 2011 net income of $1.69 million, or $0.11 per share. Our total loan loss provision for Q3 was $3.2 million. $395,000 for originated loans and $2.8 million for purchased loans, compared to Q2 2011 provision of $3.5 million, $2 million for originated loans and $1.5 million for purchased loans. A Q3 2010 provision of $2.2 million. Net charge-offs on originated loans for the quarter were $19,000, compared to $1.4 million in Q2 of 2011, and $3.3 million in Q3 2010. Our originated loan loss allowance, the total originated loans decreased slightly to 2.79% at September 30, from 2.81% at June 30. Overall, a solid earnings quarter with nice improvement in some areas of expense control. Like to take a few moments and introduce Don Hinson and he will cover some balance sheet changes as well as some comments about acquisition accounting. Don?

Thanks, Brian. First I'll start on the balance sheet. Assets grew $30.4 million during the quarter, due primarily to funds provided by $29.7 million increase in deposits. [Opal] date total originated loans increased approximately $20 million during the quarter as a result of increased loan production. This is the third consecutive quarter for originated loan growth.

As I mentioned, our total deposits increased $30 million during Q3. Total non-maturity deposits, total deposits less all CDs, increased $34 million while CDs decreased $4.5 million. Of this decrease, $3.5 million was related to CDs assumed in the Cowlitz Bank and Pierce Commercial Bank acquisitions, including $2.7 million of Internet CDs which were priced at the time of acquisition, continue to run off. There are approximately $5 million of acquired Internet CDs remaining. Our non-maturity deposit ratio continues to improve and is now a very strong 69.3% of total deposits. In addition, the percentage of non-interest demand deposits to total deposits has increased to 18.9%, up from 17.5% at the end of Q2. The continued improvement of our deposit mix has resulted in the lowering of our cost of all deposits 0.57% for Q3 2011, down from 0.61% in Q2 2011, and from 0.85% in Q3 2010.

Total equity increased $464,000 during Q3. The ratio of tangible common equity to tangible assets decreased to 14.1% at September 30 from 14.4% at June 30. The decrease in these ratios was driven by a combination of asset growth, stock buybacks in the amount of $790,000, and repurchase of the TARP warrant in the amount of $450,000. Our book value per common share increased $13.23 at September 30, from $13.14 at June 30, and our tangible book value per common share increased to $12.29 at September 30 from $12.20 at June 30.

Like the to spend a few minutes talking about the effects of the acquired loan portfolios. During the quarter we recorded a provision for loan losses on purchased loans in the amount of $2.8 million. These provisions were due substantially to the decrease in estimated cash flows in certain pools of acquired loans from the original cash flow estimations. The change in FDIC indemnification asset was a negative $1.67 million in Q3 2011, compared to a negative $1.71 million in Q2 2011. As a reminder, FDIC indemnification asset relates to covered loans obtained in the Cowlitz acquisition. Since this portfolio is performing better than originally estimated, the FDIC indemnification asset is being amortized down to its proper carrying value. Cash flows on the acquired loan portfolios will continue to be re-estimated on a quarterly basis.

Moving on to net interest margin, our net interest margin for Q3 was 5.47%. This is a 46 basis point decrease from 5.93% in Q2 2011, and 105 basis point increase from 4.42% in Q3 2010. The effect on the net interest margin of incremental discount accretion over stated note rates on the acquired loan portfolios for Q3 was approximately 72 basis points. This compares to 104 basis points in the prior quarter ended June 30. Interest reversals on non-accrual originated loans impacting the net interest margin for Q3 were approximately 11 basis points, compared to 13 basis points for Q2 and 14 basis points for Q3 2010. Without the effects of incremental discount accretion and interest reversals on non-accrual loans, net interest margin for Q3 2011 decreased 16 basis points from the prior quarter. This decrease is mostly due to lower loan yields. Without the effects of incremental discount accretion and interest reversals, loan yield decreased 23 basis points from the prior quarter.

Our focus on non-maturity deposit growth and pricing strategies continued to drive cost of funds lower, which is also a contributor to our strong net interest margin. Our cost of funds for Q3 was 70 basis points, compared to 25 basis points for Q2 and 1% for Q3 2010. Non-interest income was $861,000 for Q3 2011, compared to $2.9 million for the prior year Q3 2010. The decrease in the prior year is due substantially to the effects in the change in the FDIC indemnification asset and the gain on the Cowlitz Bank acquisition that occurred in Q3 2010. Service charges on deposits for Q3 2011 increased $120,000 from the prior period, in the prior year, primarily due to increases in deposit accounts as a result of the Cowlitz and Pierce acquisitions.

Non-interest expense was $12.4 million for Q3 2011, compared to $10.3 million for Q3 2010. This increase was due to increased salaries and benefits of $1.3 million, increased occupancy and equipment expense of $499,000, and increased marketing expense of $129,000. These increases, also, were due primarily to the Cowlitz Pierce acquisitions. Non-interest expense decreased $768,000 from the prior quarter ended June 30, 2011, due primarily to lower salaries and benefits expense. Non-interest expense control continues to be a focus of ours. However, continuing growth related expenses and other expenses such as loan resolution costs will make it likely that we'll see a higher than historical efficiency ratio over the near term. For Q3 2011 our efficiency ratio was 68.3%, compared to 69.3% for Q2 2011, and 66.2% for Q3 2010.

Brian will discuss credit quality in a few minutes. I want to spend a few minutes discussing total debt restructurings, or TDRs. During Q3 accounting guidance was implemented which resulted in the broadening of definitions of concessions made to borrowers and borrowers having financial difficulty. As a result, whereas we had previously included accruing TDRs within non-performing loans, we have since removed accruing TDRs from non-performing loan ratios. TDRs on non-accrual status, however, continue to be reported within the non-accrual balances.

The $2 million increase in TDRs during Q3 was a result of the following. First, there was a $4.8 million condo loan which was formerly an accruing TDR that was place on non-accrual status during the quarter and reclassified to non-accrual loan balances. Second, there were $7.1 million of TDRs added during the quarter, mostly due to the broadening definitions as previously mentioned. These additions are cumulative for all loan modifications occurring during the first 3 quarters. In other words, all loan modifications that were made since the beginning of the year and met the broadened definition of a TDR were added as new TDRs in Q3. Brian will now have an update on overall loan quality changes and loan growth, as well as some closing comments.

Thanks, Don. I'll refer first to loan growth. As reported earlier for the third consecutive quarter, our originated loan portfolio increased and we also, once again, achieved overall net loan increase. We believe this is significant evidence that our organic growth initiatives are working. Most all of our lenders, legacy, acquired and hired lenders are booking new lending relationships, as well as continuing to grow their pipelines and existing relationships.

During Q3, we booked a total of $49 million in loans. This total represents new loans to new borrowers, new loans to existing borrowers, as well as renewed loans. As reported earlier, originated loans increased $20.4 million. Many things influence net loan balances such as new loans, loan payments, prepayments, advances and pay downs on existing lines of credit. We analyzed all new loans over $300,000 made during the quarter, which represented a total of $31 million, and these loans break down as follows. There were 26 C&I and owner occupied CRE, commercial real estate loans, totaling $24.5 million of this $31 million. There were 6 non-owner occupied CRE loans totaling $5 million. There were 2 construction loans totaling $1.2 million. But you can see the -- most of the volume of this $31 million was in the C&I and owner occupied CRE category. Average loan size of these new loans booked was $940,000. And average yield for these new loans was 5.70%.

Loan quality, a few comments on just overall loan quality. Total originated potential problem loans decreased 17.5% to $39 million from $47.3 million, and restructured originated performing loans increased to $7.2 million from $5.2 million the previous quarter. Non-performing originated loans increased $2 million from the prior quarter. As mentioned earlier, this was due to the addition of a condo loan in central Washington of $4.2 million. Was also offset by reductions of $2.3 million in non-accrual C&I loans. The condo loan was reported as a TDR in prior quarters. As a TDR loan we had already adequately provisioned for this loan, so this classification did not result in any provision allocation changes for it. Additionally, I believe the same condo loan will have significant pay downs in Q4.

Our coverage ratio remains strong at 94.7% at the end of the quarter, which is down from 109.4% for Q2 2011, and our allowance to total originated loans at quarter end was likewise a strong 2.79%. As stated previously, our coverage ratio has been consistently over 80% and will likely remain so. OREOs. At quarter end our OREO balance was $2.6 million, up slightly from Q2 balance of $1.9 million. During the quarter we disposed of $1.1 million. We are actively working through these assets to final resolutions.

Like to make some general -- some comments and just a general review of Q3. Our Q3 performance. I'd given guidance in the past that due to our growth initiatives that our efficiency ratio is likely to hover around 70% range for the next several quarters, but for the second consecutive quarter, our efficiency ratio has improved slightly and now stands at 68.3%. I continue to be pleased with our loan growth. This has been a major focus of ours over the past year. I'm cautiously optimistic that we can continue this trend into 2012.

Our charge-offs for our legacy portfolio are at the lowest quarterly level since 2005. Our acquired assets continue to exhibit overall performance results that exceed our original expectations. I believe that loan loss provision and FDIC indemnification asset amortization for these acquired pools will abate soon and will provide some meaningful improvement to our EPS as we move into and through 2012. We are continuing our $0.05 cash dividend, which equates roughly to an annualized yield of 1.5% based on our stock price today. We initiated 5% stock buyback in the third quarter and were successful in purchasing some shares and we'll continue to be opportunistic as it pertains to share repurchases.

Some closing comments about just the general outlook. Our overall view of the balance of 2011 and 2012 is as follows. As many of you know, I have had a relatively neutral outlook on our national and Pacific Northwest economies for some time. I think the Pacific Northwest economy -- economic conditions for 2012 will continue to be basically a sideways economy. And possibly improve if we see a stabilization of home values. A flattening yield curve will create net interest margin challenges for all banks. We continue to see repricing challenges in all sectors of our loan portfolio.

I believe there will be many opportunities for the well-capitalized and well-positioned banks in 2012 and beyond. I believe consolidation in the Pacific Northwest will continue to happen. I believe for many smaller community banks the most critical issue is one of profitability. As of Q2, out of 37 community banks from Eugene, Oregon in the south to Bellingham Washington in the north, all along the I-5 corridor, and all of these 37 community banks are under $700 million in total assets, 13 of these 37 banks have efficiency ratios greater than 100%. Which, of course, means they are losing money every day they open their doors. Another 5 are over 90%, which combined with the 13, is roughly 50% of these banks have had serious profitability issues with few prospects to change these trends.

Our strategies for 2012 are fairly simple and straightforward. Continue to focus on quality organic loan growth. We have started a nice trend that I hope will continue. Our net loan growth will be modest until we see measurable improvement in our economy. We continue to focus on improving our efficiency ratio and I believe we can. Continue to improve overall credit quality and credit costs and I believe we will. Continue to focus on leveraging our capital through ongoing capital management strategies, organic growth, and acquisitions, both FDIC and open bank opportunities. FDIC assisted transactions will be fewer and fewer, but there will be some and we will be active when there are. Open bank deals will be on our terms. The economics I stated earlier favor the bank with a quality balance sheet, good core earnings, strong capital and the desire and the ability to acquire and integrate. The number of troubled banks is compelling and the prospects of continuing negative earnings trends for many of these smaller banks make an even more compelling opportunity for consolidation.

That completes my prepared remarks. I'd welcome any questions you may have. I would once again refer to our forward-looking statements in our press release as I answer any of these questions dealing with forward-looking comments. Kathy, that completes the comments and we would be pleased to open the line for questions from our group.

(Operator Instructions) Jacque Chimera.

I don't think I've ever been first in the queue before. Just a quick question, Don, on the NPAs so that I can understand what happened in the quarter because I want to make prior quarters comparable to the current quarter. Essentially what was done was that the non-accrual loan line in the NPAs was left the same and then the restructured loan line was removed from NPAs, but then any TDRs that qualified as a -- that should be in the non-accruals that weren't already in there were added into the non-accrual line in the current quarter.

As far as TDRs and non-accrual, if a TDR was a non-accrual in a prior quarter it was in the non-accrual bucket already.

Okay.

The only thing we did is that we pulled the restructured originated performing loans down out of the non-performing originated asset category. And pulled it down below and didn't include those in the ratios as we had in the prior quarters.

I can just remove that entire line item from calculations?

Correct.

Okay. And then I'm assuming that the application of the new standard didn't really have any effect on the credit quality indicators that go into the Qs and Ks, there won't be any shift in those?

Except for what will be classified as a TDR will, obviously, change because the broadened definitions.

Okay. That makes sense. Then question on the loan yields. I was a little bit surprised by the core pressure on the linked quarter basis. Is that more a function of the more you grow loans, unfortunately, the more pressure the yields will become given competition?

Yes, I think there's probably a two-fold process going on here. One, obviously, the loans that we are booking, and I think I indicated that the average yields of those new loans booked was 5.7%, which is below our historical yield and in addition to that, there's a good deal of repricing that's happening in the portfolio where borrowers are coming to us with competing offers to refinance these loans at lower rates and assuming that they're good quality projects that we don't want to allow the earning asset to leave, we'll compete with most of those -- with that reprice pressure. That's considerable. I can't quantify that for you, but there is considerable activity and our position is that we've gone to the previous expense and trouble to book that earning asset. Assuming it's a good quality earning asset, they're hard to come by today and we're going to do what we can to maintain them. So, that's continuing to put downward pressure on the NIM as well.

The $24 million number that you gave us for the C&I bucket that includes the owner occupied CRE, that includes refinances as well?

No. That is only new loans.

Oh, that's new loans okay.

There was a total of $31 million in new loans. That was just -- we didn't look at every new loan, that was loans over $300,000. In the quarter that represented $31 million. That $24 million of C&I and owner occupied CRE is of that $31 million and it's only new loans.

Okay. Great. Thank you both very much for the clarity. I appreciate it.

Jeff Rulis.

Brian, I wanted to circle back on the -- you made a couple comments about loan growth expectations broadly, but I guess versus the pace you've been growing, you've had double-digit annualized growth per quarter. Is that sustainable? When you said we see continued growth, is it expected to slow? If you can't answer that specifically, maybe if you could just talk about the pipelines if that's a shrinking number.

Well, I'll speak to both, Jeff. Pipelines, we follow pipelines on a monthly basis and we have a pretty robust process for what qualifies to even be included in the pipeline number, which is typically some sort of a term sheet that has been issued. Pipelines have come down marginally in the last few quarters, but they have come down a bit. I think --

Quarters?

I'm sorry.

They've come down in the past few quarters?

Past few months.

Months. Okay.

I would say, and I don't have that data right here in front of me, but I would guess probably in the last 3 or 4 months that there has been a fairly steady decrease to the overall pipeline, not a big number but a fairly steady decrease to the pipeline. So, I think we've got some decreases coming on the pipeline side. And I think that we -- not I think. I'll state for certain that we saw a substantial amount of pressure in Q3 for refinance activities that we had not seen in previous quarters. And as I said earlier, we try to meet all of those reprice issues and maintain the asset, but in not all cases are we successful.

So, I think that is tending to mute the overall loan growth because we will lose some out that we continue to see in the marketplace 10 year fixed. We continue to see sub 4%, 5 year fixed and so there are just some, I'll say assets -- level of earning assets that we're not willing to compete at. So, I think when you take in total, when you take the modestly declining pipeline with reprice pressures, I think our loan growth is likely to be a bit muted, in the coming few quarters, than it has been in the last couple of quarters.

Very thorough. And then Don, on the -- I want to follow up on the expenses. Obviously, a big sequential -- well, part of the sequential decline was the comp expense. Was there something in the quarter or what's driving that number down?

That was due to -- we were right-sizing, I think, some of the -- some staffing levels, in addition to adjusting some accruals in compensation for the year.

And Jeff, I'll add to that, as to right-sizing staff levels, we have not done any layoffs in the organization. But I will say that, when we have grown as much as we have in the last year and to truly understand some of these portfolios that are managed -- that our lenders manage, and to arrive at optimum levels of portfolio for lenders, we've done some right-sizing to some of those portfolios. So, I think it's just a continuing process of improving our overall efficiencies of these acquisitions.

On a broader, non-interest expense question, if you've got $12.4 this quarter, is that a sustainable base level going forward or anything coming in and out of there?

I think you might see it pop up a little bit next quarter, but still lower probably than it was the second quarter.

Lastly, just a quick one on the margin. I think you mentioned -- so is it 5.02% was the base if you back out the discount accretion? Does that sound about right?

On the margin?

Right.

If we backed out -- we've got 4.80% -- if I back that out -- well, right, I back out both the non-accrual and the --

I see.

I would get -- if I only do just the accretion, I would get 4.97% is what I --

You said 72 basis point impact from the FDIC?

Right.

Okay. Maybe a tough question to answer, but I guess any particular time line as that dissolves going forward? When do you get back to if the core's around 5%, not talking about expansion or compression from other factors, but how long does it take to get the number back to that 5% core or the discount accretion to go away I suppose?

I think each time, again, in Q2 the discount accretion, the effect was about 1% or 100 basis points. Now it's 72 basis points. Actually if I think about it, I think it's going to continue to decline. I think where we're at in the 72 basis points might hold out for the next few quarters, but it will continue to decline over time, and probably, I would say within year 3 or 4 it will -- most of it will be gone, most of the effects, so --

Okay.

Kind of hard to predict on prepayments.

Sure, sure. Okay. That's helpful. Thanks, guys.

Thanks, Jeff.

Tim Coffey.

Brian, just want to get back on the comments you were making about the pressures that you're seeing on pricing for loans. Can you give me an idea of what some of the drivers are there and are those drivers transitory? Do you think they're more permanent?

Are the drivers what?

Transitory.

Well, I think there's many things, Tim. I think operation twist certainly has had an effect on flattening the yield curve. I think it's had an effect of forcing rates lower, and so when you look at typically on a 5 year commercial loan, when we have a 5 year reprice, it's some basis to the 5 year flub. That has come down considerably in the last several months and so I think that when we look at originating new loans, they're obviously at lower rates. I think that other banks -- and we're seeing -- continuing to see quite a bit of pressure from the majors in this category, that they're especially willing to go longer 5 and even 10 year fixed. And I think that with the rates decreasing the way they have, they continue to offer rates that are substantially lower than the current note rate that we have.

So, is it transitory? I think we're going to see that pressure probably for most of 2012. Now, we try to predict what future rates are going to do and how long will this be a flat yield curve, when will we start seeing that longer end start coming back up so that these pressures go away, it's hard to say. But I think there's a better chance that it's going to be for the next several quarters, as opposed to just a more recent phenomenon.

Okay. Do you get the feeling that your customers, your borrowers believe that they're entitled to those lower rates that the bigger competitors are offering?

Well, I'm sure they probably do, but I'm sure that it probably just gets to an economic issue for them, if they can get a lower interest rate, their margins are tight as well, and that lower interest rate flows through to the bottom line. I'm not so sure it's as much an entitlement as it is an economic decision for them, economic financial decision for them to seek lower rates, lower rates in general. I also think that if they believe that they can get a 10 year rate -- I'm sorry, a 10 year fixed rate, most of them believe that rates will rise during that 10 years and so it's probably a good opportunity to fix in some 10 year fixed money. We're just -- we just are very reluctant to compete at 10 year fixed levels.

Has this impacted any of your largest relationships?

No, I wouldn't say that it's impacted the largest relationships. I think probably the relationships that it impacts most are probably the $2 million to $3 million CRE loans. That's probably where we're seeing most of the pressure.

Okay. And then just to piggyback on the expense question from a little earlier. How much fat do you think are in your expenses right now that could be trimmed in say the next 4 to 5 quarters?

Well, that's a -- I guess expenses being trimmed more, I don't see a lot of that. We're always looking for efficiencies in that area. But I think that our bigger hope is that we're going to grow into the expenses that we have because we have -- again, last year we got some of these branches were pretty small and we're looking to grow into them and create more earning assets through them. There won't be a lot of expense reduction so much as I think the asset growth that we'll, again, grow into these branches that are being acquired.

Tim, I'll add to that as well. When I talk about improving our efficiency ratio, I think Don is accurate. I think that it as much focusing on growing the top line revenue because we know there are 2 numbers to efficiency ratio and it's not only going to be on the expense side. I'm very well aware that we need to improve our efficiency ratio from its current level and I think it's going to be incremental changes. I don't think you're going to see big changes to that, but I think that as we improve our revenue, grow our branches that we acquired -- and we have been. I'm encouraged by the growth that we're seeing in these acquired branches, as well as our de novo branches. And we need to continue to focus on efficiencies and as I stated earlier, I would have guessed that our efficiency ratio would have been 70% or over as we moved throughout this -- for the balance of this year and I think we've proven that we can incrementally reduce those and that will certainly continue to be a focus of ours.

Great. Thanks, guys, very helpful.

Thanks, Tim.

Tim O'Brien.

Don, you talked a little bit about the provision for losses on the purchase loans, diminished cash flow outlook. They jumped up meaningfully this quarter. Could you give a little more color there, about what's happening with that directionally or give some color of some sort that might help us in modeling?

I'll do my best, Tim. I think that it was a quarter that was higher than we've had and my hope is higher than we'll see in the future also, as far as provisioning goes on the acquired portfolio. I think there was some loans that we were getting our arms around that we realized that there need to be some higher provisions on and turned -- the pools of loans that they're related to end up having to have impairments on. And I think that, again, that this is going to be higher than what we're going to see in the future on these. I think we're going to start seeing some leveling out, going forward on these portfolios. Again, the first time -- most of these -- most of it had to do with the most recent acquisitions. The one that actually had -- without a loss share, we also acquired more problem loans on that one and so we're getting our arms around it. This last quarter I think we ended up having more impairments on that then we probably will going forward.

Tim, just a big picture comment on that. I'm disappointed in that number. I think my disappointment probably gets to the overall accounting treatment to acquired loan pools. I think it's very confusing. I don't think in all cases does it reflect what is truly happening in the portfolios. But I'm just making this as a big picture statement.

But it certainly hasn't added clarity to you, as an analyst. Hasn't added clarity to our investors and as I stated in my general comments, I continue to be very pleased with the overall performance of those 2 acquired pools -- loan pools, and I believe that, the accounting treatment and the noise is going to soon abate. I think when it does, and you can look at the numbers, we can take the FDIC indemnification number, you can take the provision number for those acquired portfolios and you can do some math. If we can -- if and when we can reduce those substantially, it's going to add some tailwind to EPS. So, it's a short-term issue that's frustrating, but at the same time they're accounting pronouncements that we will adhere to. There's no question to that.

And then if you I heard you correct, it sounded like you said, as far as speaking of the indemnification asset outlook for change, it's going to settle on a number. It's going to stabilize around a number that's greater than zero as far as the size of the asset is concerned for the length of the contract in place. Is that the right way to look at it?

Well, it will continue to go down, but the effects on the amortization of it, so the effect on the income statement, I think, will decrease because it will settle into an area. Say that, there weren't any principal payments on the portfolio, it would settle on a number. But as principal payments -- it's actually -- indemnification asset is actually, again, an amount that we're expecting to have charge-offs on, at least related to that. So, in a perfect world, that indemnification asset would just go down due to claims submitted to the FDIC for reimbursement. So, it will go down, if nothing else through claims submitted to the FDIC. But hopefully the effect on the income statement will drop.

And beyond that with no claims submitted to the FDIC, it's got to go down anyway because it needs to be zero by the time your contractual agreement with the FDIC is over, correct? There will --

Correct.

And so, the approach of the Company would be to level and amortize that, I guess. Rather than take a lump sum hit at the end of 5 years or whatever?

It's going to go down. It is going down every quarter. It will level off -- if we get to a spot where the losses are -- what we expect to get from the FDIC is what's there. Then, you won't see an income statement effect. But again, if for some reason if we don't feel the losses are going to be there, then it will continue to have to be amortized down to zero at some point. But again, a lot of this will be reimbursed from the FDIC in cash and that's how the asset will be lowered.

Okay. Great. And then last question. Do you have a weighted average share price of the shares you repurchased?

Yes.

I know you didn't disclose it. I'm not going to force the issue.

That's okay. It was $11.40.

Great. Thanks. I appreciate it, guys. Nice quarter.

Thanks, Tim. Appreciate it.

Damian Howard.

How large are you willing to take up your construction portfolio? It's been growing the last several quarters and what level does it get to be uncomfortable?

Hi, Damian. When we -- construction portfolio, I think we need to understand that there's a lot of different construction loans. In previous conference calls, I detailed out that construction -- or excuse me our various totals. I didn't do it this time. I just didn't think that most folks out there wanted to get into all of the detail.

Having said that, I will tell you that most of the construction exposure's coming on the commercial side and most of that in Q2 was multi-family. This quarter -- multi-family and medical this quarter, a good deal of medical facilities in that number as well. I would say -- and without looking at my data, I would say 80% of the construction balances are coming on the commercial side as opposed to the residential. Having said that, I think we've got some pretty strict and tight levels of construction exposure. I, basically, would be comfortable with overall construction exposure in our portfolio at 10% or less.

10% of the outstanding loans?

Yes, 10% of outstanding loans.

Then finally, I think your buyback was wimpy for the quarter, especially if you're trading under tangible book. What's your philosophy of buying back stock?

Damian, I'm probably not going to give you a lot of color on that. Other than just to say that, I think that you will look at our historical performance in regards to stock repurchases and you'll probably begin to draw some conclusions. You can probably draw some conclusions from our historical performance of Q2. I'm sorry, Q3. And for a variety of reasons, I'm really uncomfortable in getting into any more color than that, other than to say we'll be opportunistic in that regard.

All right. Thank you. That's it.

Well, I'll add something there. The fact that we didn't actually announce it until late, August. We didn't start the program until September 1. We went into a quiet period 10 days before quarter end.

So, you had 20 days or 15 day trading days probably.

We have a limit of how much we can -- we have to follow the rules. It wasn't as much time as --

Okay. Thank you.

Thanks, Damian.

Joe [Stieven].

Good morning, Joe. Congrats to your cards last night.

We got the big one tonight. But actually all my questions just got finished up. One was on the share repurchase. So, thank you and good quarter.

Thanks, Joe.

(Operator Instructions) There are currently no questions in the queue.

Okay. Thank you, Kathy. And I appreciate everybody that has tuned into our conference call this morning and look forward to chatting with you in the future.

Ladies and gentlemen, this conference will be available for replay after 1 PM today through 11.59 PM November 11, 2011. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701, and entering access code 219587. Again, that number is 1-800-475-6701 and access code 219587. That does conclude our conference for today.