Columbia Banking System, Inc.
Q3 2013 Earnings Call Transcript

Published: 24 Oct 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's Third Quarter and 2013 Earnings. [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 Systems. You may begin.

[Melanie J. Dressel:]

Thank you, Keisha. Good afternoon, everyone, and thank you for joining us on today's call to discuss our third quarter results. And I hope you've all had a chance to review our earnings press release, which we issued earlier this morning. The release is also available on our website, columbiabank.com. This is the second quarter that our financial results reflect our acquisition of West Coast Bancorp, which was completed on April 1 of this year. As we outlined in our earnings release, our third quarter results showed the impact of the acquisition, as well as an improved operating net interest margin and good loan production during the quarter. We continue to track ahead of the modeled financial expectations related to our recent acquisition of West Coast Bancorp. And as a result, this morning, we had also announced the cash dividend of $0.11 per common share and per common share equivalent for the holders of preferred stock. The dividend represents a 10% increase over the amount paid for the prior 3 quarters and a 22% increase for the same period a year ago. And the dividend will be paid on November 20, 2013 to shareholders of record as of the close of business on November 6. Clint Stein, Columbia's Chief Financial Officer, is also on the call with me. He will begin our call by providing details of our earnings performance for the quarter. And then Andy McDonald, our Chief Credit Officer, will review our credit quality information, including trends in our loan mix, allowance for loan losses and our charge-offs. I'll conclude by giving you our thoughts on the economy here at the Pacific Northwest and an update on the ongoing integration of West Coast Bancorp and just a brief outline of our strategies as we move forward. We will then be happy to answer your questions. As always, I need to remind you that we will be making some forward-looking statements today, which are subject to economic and other factors. For a full discussion of the risks and uncertainties associated with the forward-looking statements, please refer to our securities filings and in particular, our Form 10-K filed with the SEC for the year 2012. And now, I'd like to turn the call over to Clint to talk about our financial performance. Clint?

[Clint E. Stein:]

Thank you, Melanie. This morning, we announced third quarter earnings of $13.3 million or $0.25 per diluted common share. Our reported third quarter earnings were impacted by $11 million or $0.14 per share as a result of $7.6 million in pretax acquisition-related expense and $3.4 million of net expense stemming from the accounting impact of our FDIC acquired loan portfolios. The acquisition expenses lowered EPS by just under $0.10, and the FDIC loan portfolios had a negative impact of a little more than $0.04. Reported earnings were also impacted by a pretax provision for loan and lease losses of $4.3 million related to the West Coast acquired loan portfolio. Establishing this provision reduced reported earnings by $0.05 per share. We completed our core operating system conversion during the second half of the current quarter, and the other remaining aspects of the integration process remain on plan. Prior period comparisons will begin to get easier to perform with the first quarter of 2014, giving us our first opportunity to begin to fine-tune our new expense run rates. Net interest income for the third quarter was $80.4 million, up slightly from $80 million in the prior quarter. The increase was the result of lower interest expense as income on loans was down $712,000, driven by a reduction of $756,000 in accretion income on the acquired portfolios. During the third quarter, we recognized through earnings $10 million in discount accretion on the West Coast loan portfolio. Over the first 2 quarters, discount accretion income related to prepayment activity averaged in the $2 million to $3 million range. Noninterest income before the change in FDIC loss-sharing asset was $19.5 million in the current quarter, a decrease of just under $500,000 from the second quarter. The decrease was primarily due to a slight reduction in service charge fees collected, the lack of securities gains in the current period and lower BOLI earnings. Total noninterest expense was $64.7 million for the current quarter. Our reported noninterest expense was skewed by the previously mentioned $7.6 million in acquisition-related expense for the quarter, which was partially offset by $806,000 in net benefit from OREO and OPPO, along with a reduction in the FDIC clawback liability of $188,000. After taking these items into consideration, our noninterest expense run rate for the third quarter was $58.1 million, up slightly from $57.9 million on the same basis during the second quarter. Long term, we expect to see this run rate trend downward as we wrap up the West Coast integration and continue to execute on our ongoing efficiency initiatives. Previously, we have stated our expectation of $30 million in acquisition-related expenses. To date, we have incurred a little over $19 million. At this time, we anticipate these expenses to approximate our initial estimate, leaving us a little more than $10 million yet to be recognized. We expect elevated acquisition expense to continue during the fourth quarter, followed by much lower amounts in subsequent quarters. We continue to make significant progress on the realization of projected annualized cost savings with 96% identified and 70% implemented. The remaining cost savings will be realized over the next 4 or 5 quarters. The operating net interest margin improved 7 basis points from the second quarter to 4.41% and is up 27 basis points when compared to the fourth quarter of 2012. The improvement in the operating NIM in the current period is primarily the result of lower premium amortization in the securities portfolio. The reported net interest margin increased 18 basis points on a linked-quarter basis. The increase is the result of the improved yield in the securities portfolio, combined with the second quarter repayment of the West Coast Trust preferred securities and FHLB borrowings. Our average cost of interest-bearing deposits for the current quarter was 10 basis points. This is down from 11 basis points in the prior quarter. Our cost of total deposits for the quarter was just under 6 basis points, down from 7 basis points in the prior quarter. On a linked-quarter basis, average interest-earning asset yields increased 12 basis points to 5.45% during the current quarter. The increase in yield was driven primarily by the securities portfolio. If you recall, last quarter, I mentioned the yield on the investment portfolio declined 86 basis points to 2.11% during the second quarter compared to a yield of 2.97% in the first quarter. The decline was the result of bringing the West Coast portfolio onto our balance sheet at current market yields. As a result of slower mortgage prepayment speeds, coupled with higher reinvestment rates, the yield on the investment portfolio increased to 2.32% during the third quarter. The duration of the portfolio at September 30 was 4.02, down ever so slightly from 4.1 at the end of the second quarter. On a linked-quarter basis, period-end non-covered loan totals were essentially flat for the third quarter, increasing roughly $13 million. However, production activity was comparable with the second quarter. We originated $192 million in loans compared to $190 million in the prior quarter. In a few minutes, Andy will give you the specific factors that muted our period-end totals. Our effective tax rate for the quarter was 34%, and this is consistent with the second quarter, but up considerably from 29% 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 nondeductible nature of certain merger-related expenses. We expect a full year 2013 effective tax rate in the range of 32% to 33%. Now Andy will provide you with some additional details about our credit metrics.

[Andrew L. McDonald:]

Thanks, Clint. During the quarter, our non-covered loan portfolio was essentially unchanged from the prior quarter as growth in commercial real estate loans was offset by declines in Commercial business and consumer loans. The decline in Commercial business loans was primarily centered in the finance company segment, which declined by $31 million. The decline in this portfolio was driven by some of our customers being acquired by large national -- or regional firms. We also saw a lower line utilization in this segment, reflecting the decline in mortgage refinanced volumes. Line utilization amongst our finance companies declined from 58% to 46%. This decline in the line utilization was also consistent with what we experienced across the entire portfolio but not to the same degree. Across the whole portfolio, we saw a line utilization decline from the mid-50% range down to the low 52%, 53% range. However, absent the activity in the finance company segment, Commercial business loans would have grown quarter-over-quarter as we continue to see growth in health care, ag, professional services and manufacturing, among others. Growth in the residential perm portfolio was associated with our strategy to hold for our own account jumbo mortgages, which historically we have sold on the secondary market. However, given the attractive nature of these assets, most being 1-year arms with an average credit score of 773, a loan-to-value of 67% and a debt-to-income ratio of 28%, we not only like the credit profile, but it also fits nicely with our ALCO strategies. We also saw a continued growth in our commercial real estate perm portfolio for the quarter, primarily centered in owner-occupied properties. By product type, warehouse and office properties enjoyed the most growth. The covered portfolio continued to contract, declining by $50 million before discounts and loan loss provisions or $36 million net of these items. During the quarter, we resolved a little over $15 million in problem loans. We have made great progress dealing with the FDIC acquired portfolios, and we believe the bank will be well positioned once loss-share coverage begins to expire in 2015 and 2016. 2 years ago, we had over $378 million in troubled assets in our covered portfolio. And today, that number is down to about $105 million. Most of these should be resolved before loss-share coverage expires. Nonperforming assets continued their decline this past quarter and now represent 0.87% of our non-covered assets, down from 1.04% from last quarter and 1.48% at year end. NPAs to loans and OREO and OPPO for the quarter also improved, declining from 1.6% to 1.4%. At the end of the quarter, we had approximately $12.6 million in recorded investment in TDRs, of which $1 million is included in the NPA category, which, of course, means we have $11.6 million in performing TDRs. For the quarter, the company made a provision for non-covered loans of $4.3 million, which was entirely related to the acquisition of West Coast Bank's loan portfolio. Let me give you a little more color on this. Within the portfolio of loans acquired from West Coast, there are approximately $366 million, which as of September 30, had no discount to shield them from possible loan losses. These loans were essentially valued at par or greater, which is to say some of the loans we've purchased actually came over at a premium and as such, do not benefit from the loan loss shield due to acquisition accounting or fair value treatment. This group of loans require a reserve given their lack of discount shielding, which was in contrast to the vast majority of the loans acquired through the West Coast Bank acquisition. Thus, the $366 million of loans that enjoyed no fair value discount treatment required a reserve of $3.5 million. This, of course, accounts for the majority of the provision taken in the third quarter. The rest of the reserve was related to the remaining $989 million of loans acquired through West Coast Bank that were valued at a discount, and again this discount creates a shield for future losses. So ultimately, the size of the provision has more to do with accounting treatment than any deterioration in credit quality. To provide you with some additional context, in 2011, we made our initial provision of $1.9 million for the Bank of Whitman loan portfolio in the first full quarter following that acquisition. The BOW loan portfolio was just over $170 million at the time. When you compare the Bank of Whitman to the current period initial provision for West Coast, you can clearly see that $4.3 million of provision expense on nearly $1.4 billion of loans compares very favorably. For the bank as a whole, we enjoy net recoveries for the quarter of $114,000 within the originated and discounted portfolios, which again indicates the stability from a credit perspective in these collective portfolios. Past due loans at quarter end were 39 basis points compared to last quarter when they were 46. With that, I'll turn the discussion back over to Melanie.

[Melanie J. Dressel:]

Thanks a lot, Andy. As we've come to expect during this gradual often uneven economic recovery, we are seeing mixed results in the leading indicators here in the Pacific Northwest. But on the whole, the trends continue to be positive. Washington State, particularly the Seattle-Tacoma-Bellevue area, still outpaces the United States as a whole. Oregon's economy is also showing signs of ongoing improvement, especially in the Portland market. The unemployment statistics for September that we would ordinarily discuss with you are still not available. But according to Washington's labor economists, our steady job growth has decelerated just a little bit over the past couple of months. The unemployment rate rose slightly to 7% in August, and this is partially due to more people entering the workforce. Washington has added 84,000 workers since 2008. However, Washington's unemployment rate is still lower than the national rate for August at 7.3%. In addition, jobs were added in the information services, retail trade and wholesale trade sectors, as well as in K-12 education. State economists say the broader picture continues to point to growth. The Seattle metropolitan area continues to lead the recovery in the Northwest. This area has recovered all of almost 124,000 jobs it lost during the recession. That's actually up 1,700 jobs over its pre-recessionary peak. Much of the growth has been in technology and Internet-related sectors. And in addition, the Seattle-Tacoma-Bellevue area ranks #6 for the U.S. in total value of goods and services sold overseas last year, although we ranked 15th in size. The Portland area's economy is also continuing to show consistent strength, primarily due to its strong high-tech sector. The Portland metropolitan area accounted for over 74% of the jobs added in the State of Oregon over the past year. Oregon's unemployment numbers are also not available for September. In August, rates rose slightly from 8.0% in July to 8.1%. So essentially unchanged. Over the past 12 months, government has cut 6,300 jobs or about 2.2%. However, the state's private sector has added about 37,000 jobs or about 2.7%. Six of the major private sector industry categories have each expanded by between 2.3% and 3.5% over the year, demonstrating a broad-based economic expansion. According to a state survey, Oregon had almost 43,000 job vacancies this past summer, the highest number since the beginning of the recession. The industries showing the most growth included education and health services and the manufacturing sector. The only sector to decline was in the financial services sector, which is down about 1,300 jobs. In September, Forbes Magazine listed Oregon as one of the top 10 states in the country for projected job growth over the next 5 years. And one of the reasons for this projection was the state's manufacturing output, which was the 10th highest in the country with over $55 billion in 2012. They were second in the nation, with almost $38 billion worth of computer and electronic products. And their agricultural production was worth a record $5.4 billion in 2012. 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. Prices have been higher throughout our market area, encouraging new construction and creating more jobs. However, home prices have begun to see a little bit of a dip in the Seattle market. To summarize, we continue to see a steadily improving economy here in the Pacific Northwest, one of the fastest-growing parts of the country. I'm very pleased with the progress of the integration of the former West Coast Bank. We successfully completed the core operating system conversion during the quarter, and I want to acknowledge our cross-functional teams who continue to do great work executing on the strategic plan. We're right on track with the process. As Clint mentioned earlier, our expectations were approximately $30 million in acquisition-related expenses, and we have incurred about 2/3 of that initial estimate. We're now at a point in our integration process where we can benefit on the expense side from the combined companies. Our bankers are externally focused, calling on both prospects and existing customers, which has resulted in record new loan production and continued growth in core deposits. Our bankers are also focused on producing noninterest income through the introduction of new products to a wider footprint. In addition to organic growth, we do see the opportunity for effective capital utilization through additional acquisitions that meet our disciplined criteria. And as we've shared with you for a long time, our goal is to be the very best Pacific Northwest regional community bank. And with that, this concludes our prepared comments for the afternoon. And as a reminder, Clint Stein and Andy McDonald are with me to answer your questions. And now, Keisha, will you open up the call for questions, please?

[Operator:]

[Operator Instructions] And your first question comes from the line of Joe Morford.

[Joe Morford:]

I guess my first question was just a housekeeping one, more than anything, on the provision for the West Coast portfolio. Just why wasn't that taken upon closing in the merger? And for the -- what sounded like $800,000 or so provision taken on the $989 million of loans valued at a discount, how do you reconcile that against the continued high level of discount accretion generated would suggest the assets are performing well?

[Melanie J. Dressel:]

Clint?

[Clint E. Stein:]

Sure. I'll start off, and then Andy can jump in as he sees fit. It's a process that we have to go through. I guess the way that I look at the provision is it's connecting the dots between 2 different accounting methodologies. At day 1, we fair value everything, but they're not carried at fair value beyond that point. And we have to have some sort of methodology -- accounting methodology to capture that. And the best one that we feel, or the most appropriate one we feel is our traditional methodology. So in order to run it through our traditional methodology, we need to -- we do it on a loan-by-loan basis, but we need to have the day 1 fair valuation so we know what's at a premium, what's at par, what's at a discount. And the timing of the day 1 valuation work that was completed in conjunction with the closing of the second quarter, and so, we really didn't have the data before that point in time. And then, as we go through, the next step is mapping over to our methodology, the way that our homogeneous pools, the way that we aggregate the loans. And then we had to build up the historical loss factors based off of West Coast's experience with that portfolio. And so it's kind of an iterative process that takes time, and quite honestly, it took the bulk of the third quarter to get through that process. And that's why I think the context that Andy added during his prepared remarks was relevant. It's the same process we went through with the Bank of Whitman 2 years ago, where we had to have a full quarter behind us to develop the methodology and apply it against a loan-by-loan basis. And in that case, it was less than a couple of hundred million dollars. In here, it's almost 9,000 loans that we had to apply this to.

[Andrew L. McDonald:]

Yes, I guess the thing that I would add in is this is a bit of a balancing, too, as you kind of go forward because as we accrete the discount into income, we also are reducing the shield available to cover for credit losses. And that's kind of a mix or a balance between accreting the portfolio, the shield and the income and then, also, the natural contraction in the portfolio as loans move out of the discounted portfolio into the originated portfolio as they're renewed or extended. So it's a balancing act over time. So if you think about it, it's like 11 bps on roughly $1 billion in loans. It's not a big number.

[Joe Morford:]

Right. Okay. And that's helpful. I mean, I guess, perhaps, Melanie, for you. Since the last call, there's been quite a lot of consolidation in the Pac Northwest with several transactions being announced, and I just wondered if you could update us on your own acquisition interest at the moment. And are there any particular markets of interest or geographic priorities, things of that nature?

[Melanie J. Dressel:]

Well, we're still focused on the Pacific Northwest, and there certainly has been a lot of activity. It's been interesting to watch, and we still see opportunities for us in the Pacific Northwest. We're just a very disciplined buyer, as I hope you know. And -- but we think that our growth will continue to come from both organic growth and selective acquisition.

[Operator:]

Your next question comes from the line of Brett Rabatin.

[Brett D. Rabatin:]

Wanted to ask -- if you gave it, I missed it, but just thinking about the level of production this quarter versus last. I know it was higher, but I missed the actual numbers if you gave them. And then just thinking about the payoffs you had that impacted the growth this quarter. If you could talk maybe some more about that as well.

[Melanie J. Dressel:]

Sure. Andy, would you like to take that?

[Andrew L. McDonald:]

Yes. So our loan production was, I think, around $195 million, if my memory serves me correct. So it's a little bit up from last quarter, which, I think, was about $190 million. Some of the significant payoffs we had, well, some were in the finance company portfolio where we had some borrowers actually just taken out by larger companies. And that accounted for about $20 million in sort of unexpected or something that I wouldn't necessarily characterize as normal. And then we did have quite a bit of payoff in the retail book. We had a customer that we had financed a lot of convenience stores and fast food restaurants. They've acquired quite a portfolio over time. They got an offer they couldn't refuse, and so those loans got paid off, and that was another significant reduction as well. In total, payoffs and other changes were probably around -- I mean, what am I saying, $180 million?

[Brett D. Rabatin:]

Okay. And is that a number that you think declines? Or does -- what you're seeing suggest that they'll continue to be the case with what's going on with just everyone trying to refinance fixed rate borrowing, that kind of thing?

[Andrew L. McDonald:]

Yes. I think that number's probably a little bit higher than what we've seen in the last couple of quarters, and it had to do with the activity in those 2 segments of the portfolio.

[Melanie J. Dressel:]

I think there are a couple of other things, Brett. One is that the Pacific Northwest seems to be a very attractive place for investments from out-of-state banks. And we're just seeing a lot of our long-time small business owners who have very attractive businesses reaching an age where they're thinking about a liquidity event as well. And being in an attractive area, I think that we'll continue to see some consolidation there. But the best news to me about our loan production for this last quarter is that we saw really good loan production throughout our footprint. And I think that, that's really meaningful by virtue of the fact that we've been going through an integration process. So great kudos to our team for staying externally focused.

[Brett D. Rabatin:]

Okay. And the other thing I was just curious about was the amortization of the indemnification asset with the change in the accounting. Can you talk about that from a go-forward perspective? And how we should think about the adjustment you had this quarter versus kind of what you'll have ongoing?

[Clint E. Stein:]

Sure. It's -- our biggest loss sharing agreements were on the first 2 transactions we did, Columbia River and American Marine. And those expire in January of 2015. As we look at the accounting change, it had an accelerated impact from -- through 2013 and 2014. But as we move on a quarter-by-quarter basis through those time periods, the impact lessens. So I guess, as you're looking at it, if you look at kind of our first quarter, second quarter, third quarter trend and you carry that forward through 2014, and then I think you see a substantial trail off because it'll be -- the 2 biggest loss share agreements we have will have expired. So that amortization will be gone.

[Operator:]

Your next question comes from the line of Jeff Rulis.

[Jeffrey Rulis:]

I guess, a couple of questions there, I guess, adjacent to the questions you've had. But on the -- I guess, Melanie, on the production versus payoff sort of discussion, how has that progressed in Q4?

[Melanie J. Dressel:]

I don't have the answer for that.

[Jeffrey Rulis:]

Okay. I guess, the general read on...

[Melanie J. Dressel:]

I would say it's a little bit too early to think about anything that's happened in the last month as being indicative of what we would see for the rest of the quarter. Anyway it's just -- it's not a straight line.

[Jeffrey Rulis:]

Okay. I guess, is it safe to -- I mean, your commentary on the production side, you seem pretty positive.

[Melanie J. Dressel:]

Absolutely.

[Jeffrey Rulis:]

And I guess, okay...

[Melanie J. Dressel:]

Yes. And the pipeline is still very strong. So from a production standpoint, I'm feeling good about that. But it's the payoff and line utilization that's too early to track.

[Jeffrey Rulis:]

Sure. And then maybe on the -- are you able to kind of break out what sort of the West Coast platform -- I know that it's truly a -- it's a Columbia bank now. But in terms of where that production was coming from, you sort of alluded to you were encouraged by pretty broad-based growth, but we can assign that, say that the West Coast piece is producing in step with the legacy COLB.

[Melanie J. Dressel:]

Yes. They really are. It's -- we break it out by regions. In some of the regions, we're a little bit different because we took some of the legacy Columbia Bank and added it to the Oregon footprint just because they pace that way, but it was very strong in the third quarter. So -- and that was a real litmus test for me in terms of were people really able to be externally focused, and I'm very pleased with what they were able to do.

[Jeffrey Rulis:]

That's great, and then just...

[Melanie J. Dressel:]

And the Eastern -- I might say, too, the Eastern Washington, which is one of our newer areas as well, is very strong. And it's not just on the loan side that's really developing the relationships, which has included the deposits as well.

[Andrew L. McDonald:]

Yes, I have some additional color in the prior quarter, that area of the footprint originated about $50 million. And in the quarter just ending, they did about $66 million. So they're definitely trending in the right direction, and the bankers down in the Oregon and the Southwest Washington market have been very successful.

[Jeffrey Rulis:]

Great. That's good color. And then, maybe just again a follow-on. A lot of deal activity, it's pretty earlier on one transaction and very early on another, but I guess benefits from either sort of lending talent and/or customers you're seeing any initial fallout or benefit from the deal activity?

[Melanie J. Dressel:]

I guess that it's a little bit too early to know if it's a direct result of any deal that was announced. But certainly, we're continuing to grow our market share, and I would expect that we will continue to have that opportunity.

[Operator:]

[Operator Instructions] And you have a question from the line of Jackie Chimera.

[Jacquelynne Chimera:]

Just a few quick questions. Some of them -- I'm sorry to touch back on some things we covered a little bit. I just wanted to make sure that I understand. Clint, this one's for you. The $4.2 million that's referenced in the press release on the indemnification assets, is that one time or is it related to the change in methodology that took place in 1Q?

[Clint E. Stein:]

No, it'd be related to the change in methodology that took place in the first quarter.

[Jacquelynne Chimera:]

Okay. So it's just an ongoing flow. Then, it's not anything unique to this quarter?

[Clint E. Stein:]

Correct.

[Jacquelynne Chimera:]

Okay. And then looking at the provision, and I understand the methodology behind what happened in the quarter. Was this kind of a onetime true up? I know it's not a true up, but as a way to think about it? Or is it something similar to other methodologies where, like the accretion that happens and you're constantly re-forecasting cash flows that'll happen as well?

[Clint E. Stein:]

It's a little -- I guess, as I mentioned, to me, it's like connecting the dots between the 2 different methodologies, the 2 different accounting models that we utilize between purchase accounting and then our ongoing. Certainly, the portfolio, I guess, the key difference is that this portfolio dwindles as time goes on as opposed to a legacy portfolio where you continue to grow it, and then continue to make provisions based on that growth. So I think that the current quarter activity is not necessarily indicative of what I would expect for future quarters.

[Jacquelynne Chimera:]

Okay. So going forward, it'll behave more like the legacy organic book when you forecast what necessary level of provision would be?

[Clint E. Stein:]

Correct. We use the same methodology as the legacy portfolio. The only difference being is that the loss rates are the historical loss rates for that specific portfolio versus the legacy Columbia portfolio.

[Jacquelynne Chimera:]

Okay. And am I correct in assuming that excluding that impact, the provision expense would have been de minimis or possibly even a reverse provision just on the legacy COLB book?

[Clint E. Stein:]

Yes. If you look at just the legacy book, there was no provision. With the covered loans, I think we break that out on the financials that we actually had a recapture of impairment on that of a little over $900,000.

[Jacquelynne Chimera:]

I mean, just not the covered or the FDIC-assisted deals but just the legacy.

[Clint E. Stein:]

Right. There was no provision on the legacy book.

[Jacquelynne Chimera:]

Okay. And then the $7.6 million in expenses, do you have a breakout on what that categories that fell into?

[Clint E. Stein:]

Jackie, I do, but I didn't bring it in the room with me. I'm happy to follow up with you offline on that. It's going to be the same general categories that we had last quarter, compensation, severance-type things, professional fees with the core conversion. It's going to be those types of things that drove it, but I just didn't bring the breakout in with me.

[Jacquelynne Chimera:]

Okay. So just -- if I take the breakout that you gave last quarter, I can apply kind of the same percentage weighting to that, and it'll give me pretty decent estimate of it?

[Clint E. Stein:]

You're going to be pretty close, I would say.

[Jacquelynne Chimera:]

Okay. And then lastly, I guess, seeing that your integration is complete, you have branch closures all set and everything seems to be running better than expectations, what is it that's left in that $10 million to $11 million that still needs to be taken care of from a West Coast perspective?

[Clint E. Stein:]

Well, we still have some occupancy-related things in terms of it's been -- I guess, now, it's been 2 months since we did the branch consolidations. But there's still a wind-down process there. So we'll still have some activity related to that. The core conversion piece, while it's done, the -- there's other systems conversions that are occurring. We had over 25 different systems that we had to integrate, and they're at various stages. And then even with the core conversion itself, there's kind of a trail on as we receive invoices and things of that nature from our core provider. And then, also, the compensation piece of it, retention, we had to retain a fair number of folks through conversion and change of control agreements and those things. So you'll see some in compensation. So it's going to be sprinkled, I would say, more in the IT and personnel area with a little bit hitting the occupancy.

[Jacquelynne Chimera:]

Okay. And those are areas where the remaining cost saves will probably be coming out of as well in -- beginning partly in next quarter and then in 1Q as well?

[Clint E. Stein:]

Yes, I think that's a fair conclusion.

[Operator:]

[Operator Instructions] And you have a follow-up question from the line of Brett Rabatin.

[Brett D. Rabatin:]

I just had a follow-up on loan yields in the quarter and just thinking about the prepays or the payoffs, did those impact, from a prepaid and penalty perspective, the margin and the loan yield in 3Q?

[Clint E. Stein:]

Loan yields were up a little bit that -- but I think it's more driven by what we saw happen with interest rates in general in the second quarter. I'm not aware of any large prepayment piece that we took in that would have impacted the margin. The biggest driver of the margin expansion was what happened on the securities side.

[Brett D. Rabatin:]

Okay. And then, maybe since I'm asking questions about the margin, just thinking about liquidity and the securities portfolio from here, with the margin being able to meet, do you think cap at a similar level as 3Q going forward as you continue to try and grow the loan portfolio at a more rapid clip?

[Clint E. Stein:]

That's -- the operative word is growth in the loan portfolio. The headwinds are still there in terms of margin pressure. It's gotten a little easier with the -- with what we're able to do in the investment portfolio. But still, our investment yields are significantly lower than what we can do on the loan book. So to the extent that we enjoy loan growth and that we would expect to be able to hold the margin, but that's -- it really comes down to that asset allocation, and we won't know till we get there.

[Operator:]

And you do have a follow-up question from the line of Jackie Chimera.

[Jacquelynne Chimera:]

I just had one last thing, and this one's for you Melanie. I feel like recently -- and it was kind of -- your prepared remarks also led into this. I feel like all of a sudden, everyone has gone from thinking that Portland is pressured and it's not doing that well to now it's starting to do a lot better. Do you have any sense for what it is that caused such a sudden shift or I mean, maybe I'm the only one who feels this. But I feel like it just kind of happened all of a sudden.

[Melanie J. Dressel:]

Well, I would say that I felt like it was slower than the Seattle-Bellevue-Tacoma marketplace, say, 1 year ago and up until the last couple of quarters. But it's been pretty steadily improving and particularly, in the manufacturing area. I would say that's where the real benefit has been.

[Jacquelynne Chimera:]

Okay. So maybe something where, I guess, at least from my impression, we've been so focused on the strength in Seattle that Portland snuck up?

[Melanie J. Dressel:]

Yes, I mean, I just think that it's been more gradual whereas Seattle and the Seattle metropolitan area just really -- when things started to improve, they improved really rapidly. So it may have made it appear that Portland was lagging a little bit behind it. It was just that it was very fast growth in the Seattle metropolitan area, and it continues to be that way. It's a real positive market.

[Operator:]

And at this time, there are no further questions.

[Melanie J. Dressel:]

Okay. Well, thanks, Keisha. Thanks to all of you who listened and participated today. We really appreciate it, and I guess, that we won't talk again until after the New Year. So we'll just look forward to ending the year on a strong note and pushing into 2014. So thanks, and happy holidays to everybody.

[Operator:]

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