Columbia Banking System, Inc.
Q2 2013 Earnings Call Transcript

Published: 26 Jul 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking System's Second Quarter and 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Melanie Dressel, President and Chief Executive Officer of Columbia Banking System.

[Melanie J. Dressel:]

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 showed the impact of that acquisition, as well as strong organic loan growth and an increase operating net interest margin. Clint Stein, Columbia's Chief Financial Officer, is on the call with me today. He 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 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.

[Clint E. Stein:]

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 have 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 clearer over the next 2 quarters as we wind down the integration process. At this time, I don't see these expenses exceeding $30 million, but I do expect that 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 a 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 certificate of deposits and public fund sectors. Our cost of total deposits also benefited from West Coast's 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. The 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 a result of bringing the West Coast portfolio onto 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 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 noninterest income was $6.8 million for the second quarter, and we have previously stated that one of our core performance measures is to compare noninterest income before the change in FDIC loss-sharing asset. 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 noninterest income during the quarter when compared to the sum of Columbia and West Coast individual first quarter performance. Total noninterest expense was $64.5 million for the current quarter. Our reported noninterest expense was skewed by a 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 noninterest 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 then. 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 proportionate factor for the state of Oregon and the nondeductible 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 the 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.

[Andrew L. McDonald:]

Thanks, Clint. As we have been discussing, the recent acquisition had a material impact to our financial statement, including the addition of $1.4 billion of 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 term loans remain our largest asset class, increasing from 42% of non-covered loans to 48%. The mix, though, between owner-occupied and nonowner-occupied remains the same, with nonowner-occupied commercial real estate term loans comprising 59% of our total commercial real estate term 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 2 largest segments at 19% and 16%, respectively. Warehouse, which used to be #1, is now our third-largest concentration. And manufacturing and industrial properties is in the fifth spot, which used to be hotels, 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 #1 at 16% of commercial business loans, followed by health care, 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 provisions. As detailed in our press release, nonperforming assets were approximately 1% of our non-covered assets, up slightly from 0.99% last quarter. The increase was primarily due to the nonperforming 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've begun the quarter with approximately $79 million in nonperforming 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 details in 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 1-to-4 family term portfolio, approximately 5.3% of this portfolio is nonperforming 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 term 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 Banc portfolio, as well as some asset resolution within the legacy portfolio. 1-to-4 family construction actually saw a negative migration because it's moved from 13.1% of NPAs to 22.8%, and this was solely due to the addition of West Coast Banc 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 had just over $15 million of commercial nonperforming assets. The consumer portfolio also remained relatively stable, with about 1% of it being nonperforming 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 nonperforming 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 they were 48. In summary, we are feeling good about the direction of the portfolios moving, and the addition of the West Coast Banc loans fits well with our desire to maintain a well-diversified loan portfolio. And now, I'll turn the call back over to Melanie.

[Melanie J. Dressel:]

Thanks, Andy. Now I'd like to spend just a few minutes and bring you 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 lumpy, we're seeing continued improvement, with Washington State still outpacing the United States as a whole and Oregon's economy showing steady economic growth that is pointing to sustained expansion. As I've mentioned before, our major metropolitan areas here on 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 [ph] 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, ticking 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 in manufacturing orders, boosting the index, which haven't lost ground for over 8 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 import, agriculture and wood products, exports 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 shift from development to production. Boeing continues to predict that the commercial market for aircraft will have an annual growth rate of about 4% over the next 20 years, and they have 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 thus far is 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 teams have engaged with both prospective and existing customers to make sure there is 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 Banc into Columbia has gone very smoothly, and we're right on track with where we expected to be in that process. The cross-functional teams have done an extraordinary job of executing on the integration plan, with many of the system conversions to occur during the third quarter. Of course, we will still have a couple of quarters to be 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 noninterest 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:]

[Operator Instructions] Our first question comes from the line of Aaron Deer.

[Aaron James Deer:]

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?

[Melanie J. Dressel:]

Sure. Andy, would you like to take that?

[Andrew L. McDonald:]

Sure. In the C&I portfolio, we continue to see traction in the health care area. And again, we have a fairly strong presence with dentists, orthodontists, primary care providers, and then we also do fairly well with 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 -- some [indiscernible] to tell there, I think for commercial construction is certainly visible. And so we saw construction balances also increased. Within the CRE portfolio, a little bit more modest growth there, but we continue to see some multifamily activity, a little bit of retail. But a large part of the growth in the quarter was actually in our owner-occupied portfolio, which is principally warehousing industrial properties.

[Melanie J. Dressel:]

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

[Aaron James Deer:]

And just -- given that we're hearing from a lot of banks 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, or you're just not seeing quite the level of competition that we are hearing about elsewhere?

[Melanie J. Dressel:]

Well, I'm not hearing that there's 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 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 opportunity.

[Andrew L. McDonald:]

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 or shorter life. I think banks are willing to get a little bit more competitive. Our originations are probably down 25 to 30 basis points from where they were several months ago, but we're coming in at about LIBOR plus 75 in terms of the C&I stuff. But when you throw the floors in, we're actually getting at about 325 to 350 because, obviously, the floor has provided some protection. The CRE assets, we never have gotten overly aggressive there, which is -- this sounds really odd for me to say it because we're still originating loans on the low 4s, and that seems aggressive. But we have seen our competitors go sub-4. 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.

[Operator:]

Our next question comes from the line of Matthew Clark.

[Matthew T. Clark:]

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

[Melanie J. Dressel:]

Clint?

[Clint E. Stein:]

Well, the accretion is trending downward. Last quarter, some commentary on what we expected in terms of accretion, both the 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're subject to change as we re-yield and recast 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 rate portfolio continues to wind down. And 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 1 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 wildcard, is what do we have in terms of prepayments. Absent that, $7 million was what we had for a run rate in the second quarter.

[Matthew T. Clark:]

Okay. All right. And then on the expenses, it looks like -- I mean, correct me 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 of million. Can you give us an update there whether or not you extracted anything from West Coast yet, and what you might be doing in legacy COLB?

[Clint E. Stein:]

Yes. 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 a run rate -- 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, to see what 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 every day. 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 them, they come 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.

[Matthew T. Clark:]

Okay. And then the last one, just on the OREO gains there, I mean, you've had gains for the last 4 or 5 quarters. Is that -- 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 them down enough that we could continue to see gains.

[Andrew L. McDonald:]

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. And so we've been enjoying fairly consistent gains there. But if you also look at the details 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.

[Operator:]

Our next question comes from the line of Jeff Rulis.

[Jeffrey Rulis:]

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?

[Andrew L. McDonald:]

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 the prior experience for several quarters was that portfolio was contracting. So we really think that the bankers down in that footprint have 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 2 banks.

[Jeffrey Rulis:]

And then, Melanie, any clarity on sort of capital management going forward, I guess, post-close and maybe some clarity on Basel, if anything's changed 3 quarters later for you?

[Melanie J. Dressel:]

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 dividend, 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 it was last week, I still don't feel as though there's a lot of clarity. The 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 that new information and with West Coast. But there's a lot of gray area right now just around levels of capital banks are going to be required to have, and I wish that I had the answers on that.

[Jeffrey Rulis:]

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

[Clint E. Stein:]

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

[Jeffrey Rulis:]

Okay, okay. And maybe, Clint, one quick one on the -- 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.

[Clint E. Stein:]

Yes. 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 the position to enjoy a little bit of expansion in the NIM. And I just -- I haven't taken the time to refresh those numbers as it relates directly to this quarter.

[Jeffrey Rulis:]

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

[Clint E. Stein:]

Well, I think that we'll still have potentially some pressure until the short end of the curve starts to move, when 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 will continue to have loans repricing. We -- just the average note rate on our originated portfolio is 472. We're originating things that have lower rates 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. It 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 that come in and out of the investment portfolio and put them to work in the loan portfolio, then I think that the margin stays flat. If that's not the case, then I think that it gets pressured.

[Operator:]

Our next question comes from the line of Joe Morford.

[Joe Morford:]

Yes, most of my questions have been asked, but just to follow up on a couple of things. One, just on that last point. In terms of the outlook for the investment portfolio, should we expect that to just 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 steeping in the L-curve we've seen?

[Clint E. Stein:]

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 backfilled 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.

[Joe Morford:]

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

[Andrew L. McDonald:]

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 occurs in our ag portfolio.

[Operator:]

Our next question comes from the line of Brett Rabatin.

[Brett D. Rabatin:]

I wanted to first ask you -- I think, last quarter, you became a lot more optimistic on economy in your markets vis-à-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're seeing 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.

[Melanie J. Dressel:]

No, I continue to be really pretty optimistic, and I really 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 a number of people that have reentered 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 wildcard 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're our big defense contractor 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 halt in terms of growth. I feel really good about it right now.

[Brett D. Rabatin:]

Okay. And then the other thing was -- maybe I missed it and I know you talked some about the amortization on the acquired securities, but I missed it, if you gave the interest reversal on the nonaccrual loans in the quarter. And then just any thoughts on sort of the West Coast portfolio kind of post the close. You obviously had really strong growth in 2Q. I didn't know if there was any loans [ph], maybe you decided that we're not the kind of -- quite as you weren't wanting so that I didn't know if there would be any kind of pullback from what you acquired during the quarter.

[Clint E. Stein:]

I can 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.

[Brett D. Rabatin:]

Okay. So pretty minimal.

[Clint E. Stein:]

Yes. The interest reversals essentially are a 1-basis-point add-back to the operating NIM.

[Andrew L. McDonald:]

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 type of loans that they have. We think they're very complementary to the mix and types that we were pursuing before the transaction closed. So we are not contemplating any portfolio sales at this time.

[Operator:]

[Operator Instructions] Our next question comes from the line of Jackie Chimera.

[Jacquelynne Chimera:]

I just wanted to touch on some of the borrowings, so probably a question for Clint here. I noticed that the FHLB borrowings were up in the quarter, and I just wanted to see how that played out with the payoffs 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.

[Clint E. Stein:]

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 have 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 borrowings that you're seeing at quarter end, a lot of what -- what we were able to do during the quarter that really helped the margin is try to manage our overnight funds close to 0. 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 or $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.

[Jacquelynne Chimera:]

Okay. So just shorter-term spend in maturity, I'm guessing, and that's just a cash management tool?

[Clint E. Stein:]

Exactly. Yes. They're bouncing between overnight and 7 days. You get a substantial reduction in the charge if you take a 7-day advance, so we have a couple of those.

[Jacquelynne Chimera:]

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 movement and where that portfolio wound up pricing from a fair value point of view?

[Clint E. Stein:]

I think the answer is both. It's -- 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 value 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, it lowers the yield, and the accretion income on the loan side increases your yield. So it will be ongoing, as long as the bonds are still part of our portfolio. There will be some sort of day 1 premium assigned to those. And their portfolio was 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.

[Jacquelynne Chimera:]

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 the $9.2 million throughout the various noninterest expense item sell stuff [ph]?

[Clint E. Stein:]

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 $1 million just in other various categories.

[Operator:]

[Operator Instructions] And there appears to be no further questions at this time.

[Melanie J. Dressel:]

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

[Operator:]

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