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Columbia Banking System (NASDAQ:COLB)

Q1 2013 Earnings Call

April 25, 2013 4:00 pm ET

Executives

Melanie J. Dressel - Chief Executive Officer, President, Executive Director, Chief Executive Officer of Columbia Bank, President of Columbia Bank and Director of Columbia Bank

Clint E. Stein - Chief Financial Officer, Chief Accounting Officer and Executive Vice President

Andrew L. McDonald - Chief Credit Officer, Executive Vice President and Chief Credit Officer of Columbia Bank

Mark W. Nelson - Chief Operating Officer, Executive Vice President, Executive Vice President of Columbia Bank and Chief Operationg Officer of Columbia Bank

Analysts

Joe Morford - RBC Capital Markets, LLC, Research Division

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Matthew T. Clark - Keefe, Bruyette, & Woods, Inc., Research Division

Jeffrey Rulis - D.A. Davidson & Co., Research Division

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Jacquelynne Chimera - Keefe, Bruyette, & Woods, Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's First Quarter and Year 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, Michelle. Good afternoon, everyone, and thank you for joining us on today's call to discuss our first quarter results. I hope you all have had a chance to review our earnings press release, which we issued at 1 p.m. yesterday just prior to our Annual Meeting and which is also available on our website, columbiabank.com.

With me on the call today are Clint Stein, our Chief Financial Officer; and Andy McDonald, our Chief Credit Officer. Mark Nelson, our Chief Operating Officer, will also be available for questions following our formal presentation. As we outlined in our press release, our first quarter results showed strong loan growth, increased operating net interest margin, reduced expenses and continued improvement in our credit quality.

Clint will begin our call by providing details of our earnings performance for the quarter and will clarify the improvements we've achieved in our core performance measures. Andy will then review our credit quality information, including trends in our loan portfolio. I will conclude by giving you our thoughts on the economy here in the Pacific Northwest and an update on our merger with West Coast, as well as a brief outline of our strategies as we move forward. We will then be happy to answer any questions you might have.

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 E. Stein

Thank you, Melanie. Yesterday afternoon, we announced first quarter earnings of $12.2 million or $0.31 per share. This compares to $8.9 million for the same quarter of 2012 or $0.22 per share.

If you recall, earnings in the first quarter of 2012 were suppressed by a higher level of provision expense and a $2.2 million write-down of OPPO. On a linked quarter basis, our reported earnings decreased $1.3 million or $0.03 per share from the fourth quarter of 2012. The decrease is primarily attributed to the $1.9 million, net of tax, or $0.05 per share recovery on a previously impaired municipal security recorded during the fourth quarter of 2012.

We provided a table in our earnings release, illustrating the impact of certain accounting entries associated with our acquired loan portfolios. The net effect of our acquired loan accounting resulted in reduced pre-tax income of $2.2 million for the current quarter. This is a change of $2 million when compared to reduced pre-tax income for acquired loans of $166,000 for the fourth quarter of 2012 and a reduction of $7.3 million from the first quarter of 2012.

The impact of our acquired loan accounting has shifted from a tailwind to a headwind over the course of the past 2 quarters. To assist you with your analysis, we included a new table in the financial statistics section of our earnings release to summarize the key components of our acquired loan accounting over the past 5 quarters.

Our current estimate is that total accretion income on the covered portfolios will be roughly $55 million in 2013 and $38 million in 2014. This compares to total accretion income of $86.7 million for 2012 and should not be confused with incremental accretion income. Please keep in mind these are just estimates and subject to adjustment as expected cash flows on the covered loan portfolios change. The operating net interest margin improved 7 basis points to 4.21%. Our net interest income before factoring in the change in incremental accretion income increased $1 million on a linked quarter basis.

The improvement in the operating NIM can be attributed to the steps we took in the previous quarter to improve the margin going forward, as well as a lower average balance in overnight funds.

As the closing of the West Coast transaction approached, we were able to fine tune our estimate of cash necessary to accomplish our objectives at the effective date of the merger. This enabled us to drop over overnight funds position by roughly $125 million. Our average costs of interest-bearing deposits for the current quarter was 16 basis points, down from 18 basis points in the prior quarter. Our cost of total deposits for the quarter was just 11 basis points, down from 12 basis points in the prior quarter. Our biggest opportunity on the funding side in the next quarter will come from the $155 million in certificates of deposits that will mature. These CDs have an average rate of 48 basis points. Also, we are fine tuning our rates on a couple of other products, which will drive our deposit cost down fractionally.

On a linked quarter basis, average interest earning asset yields decreased 18 basis points to 5.18% during the current quarter, down from 5.36% in the prior quarter. The 18 basis point decline in yield is 1/2 of the 36 basis point decrease experienced in the prior quarter.

We originated just over $180 million in loans during the first quarter. This represents a substantial increase over the origination volume in the first quarter of last year. The average note rate on our non-covered loan portfolio was 4.84%, down from 4.94% in the prior quarter.

The yield on the investment portfolio declined 10 basis points to 2.97% during the first quarter. The duration of the portfolio at March 31 was 3.97, up from 3.63 of the end of the fourth quarter. The increase in duration was driven by the purchase of $80 million of 5- to 7-year bullet agencies [ph].

Total non-interest income was $1.7 million for the first quarter, down from $6.6 million in the prior quarter. One of our core performance measures is to compare non-interest income before the change in FDIC loss-sharing asset. On this basis, the first quarter experienced a decrease of $4.1 million over the fourth quarter of 2012. The decrease is largely due to the additional security gains of $3.3 million recognized in the fourth quarter, coupled with $605,000 recognized in gain on loan sales in the prior quarter. On the same basis, when compared to the prior year, non-interest income is up $591,000 or 5%.

Total non-interest expense was $38 million for the current quarter, slightly higher than the $37.8 million reported in the prior quarter, but significantly lower than the $44.4 million we reported in the first quarter of 2012.

I'll briefly walk you through the math to get to a comparable non-interest expense run rate. The current quarter includes: $723,000 of merger expense; $2.5 million in net benefit from OREO; and $235,000 in clawback liability expense.

The prior quarter included: $649,000 of merger expense; $1.4 million in net benefit from OREO; and $154,000 in clawback liability recapture.

After taking these items into consideration, our non-interest expense run rate for the quarter is $39.6 million. On the same basis, the run rate for the fourth quarter of 2012 was $40 million. And for the third quarter of 2012, it was $40.6 million.

We have added a merger expense line item in our quarterly financial statistics section of our earnings release to assist you in performing your own analysis in future periods.

Earlier, I mentioned fine tuning our cash position in relation to our needs to close the West Coast merger. I've previously stated that it was our intent to redeem the $51 million in West Coast trust preferred securities and to pay off their $128 million in Federal Home Loan Bank advances simultaneous with closing the merger. It wasn't because of a lack of effort, but we were not [indiscernible] to redeem the TruPS at the close. The redemption process is underway, and it will be paid off in the middle of June. We did repay $78 million of the Federal Home Loan Bank advances, but elected to retain the $50 million of advances with 2013 maturities because it made the most financial sense.

West Coast's CFO provided me with the first quarter performance summary for their results. And since they are not required to file a 10-Q this quarter, I will give you a high-level overview of their standalone performance.

Excluding merger-related expense, pre-tax income was $9 million; non-interest income was $7.8 million; non-interest expense, excluding merger-related items, was $19.4 million; provision expense was a recapture of $231,000; loans were essentially unchanged at $1.49 billion [ph], while deposits declined $53 million, which is consistent with past seasonal deposit activity.

The cost of total deposits was 7 basis points for the quarter, and non-performing assets decreased 4 basis points to 1.62%. The net interest margin contracted 7 basis points to 3.65% due to higher levels of cash held in overnight funds and continued pressure on loan yields.

And now, I'll turn the call over to Andy McDonald.

Andrew L. McDonald

Thanks, Clint. During the quarter, our non-covered loan portfolio increased approximately $94.7 million or 3.7%. We enjoyed growth in commercial business loans, commercial real estate loans and commercial real estate construction loans. Consumer loans and residential permanent loans had modest decline. Growth in commercial business loans was primarily centered in healthcare and social services followed by professional services and retail. Healthcare and social services are the largest concentration for commercial business loans, comprising 18.3% of all commercial business loans, followed by finance and insurance at around 14.8%.

I would note that we did see some seasonal contraction in the agricultural portfolio this quarter, which declined $10.7 million or 6.3%. Commercial real estate term loans grew about $45.7 million for the quarter. Almost all of this growth was in non-owner occupied commercial real estate properties, as owner-occupied properties remain relatively unchanged. Growth in this segment was centered in office and multi-family property types.

The covered portfolio continued to contract, declining by $39 million before discounts and loan loss provisions or $28 million, net of these items.

During the quarter, we resolved a little over $24 million in problem loans before discounts and loan loss provisions. Non-performing assets continued their decline this past quarter and now represent just under 1% of our non-covered assets, down from 1.08% last quarter. NPAs to loans, OREO and OPPO for the quarter also improved, declining from 1.9% to 1.7%.

As for each of the portfolio segments there as follows: 1-to-4 family permanent loans saw a decline from 5.6% to 5.2%. The amount of NPAs in total declined 6% this past quarter. The decline in NPAs was essentially greater than the decline in the contraction of the portfolio, thus improving your credit metric. In total, we have only about $2.3 million in NPAs in this segment.

Commercial permanent loans declined from 2.3% to 2%. This segment was principally responsible for our decline in NPAs this past quarter, as commercial NPAs declined about 10%.

1-to-4 family construction fell from 15.3% to 13.1%. Similar to last quarter, we continue to make progress here. And while the ratio is high, the absolute dollar amount is only a little over $7.5 million. Commercial construction had 1.4% of their loans as NPAs. Essentially, even with last quarter, all we have left in this bucket is a small OREO project on the Olympic Peninsula. So essentially no change from last quarter.

Commercial business continued to be at 0.9%. The portfolio remained stable throughout this quarter. We have just over $10.4 million in commercial business non-performing assets. Consumer, 0.8% NPAs for that bucket. After peaking in the third quarter of 2011 at around 4.2% of consumer-related loan assets, it has steadily improved and represents the smallest component of non-performing assets at just a little over $1.2 million. As of the end of the quarter, we also had approximately $11.6 million in recorded investment in TDRs, of which $3.7 million is included in the NPAs I have previously discussed.

This, of course, means we have $7.9 million in performing TDR. For the quarter, the company had a provision recapture for originated and discounted loans of $1 million, compared to a provision of $2.4 million last quarter and $4.5 million for the same quarter last year. The provision recapture for originated and discounted loan losses during the current quarter was due to not only improving credit metrics within the portfolio, we also enjoyed a $2 million recovery during the current quarter related to a single-family lot development loan, which was located in King County. Past due loans at quarter end were 48 basis points, essentially even with last quarter when they were 47 basis points. So in summary, it was another positive quarter, with our credit metrics continuing to move in a favorable direction, albeit at a modest pace.

With that, I'll turn the discussion back over to Melanie.

Melanie J. Dressel

Thanks, Andy. We're continuing to see improvement in the Pacific Northwest economy, particularly in our major metropolitan areas, which are recovering significantly faster than Washington and Oregon as a whole. According to Kiplinger, the recovery in housing is firmly underway, particularly in the Seattle-Tacoma-Bellevue; and Portland, Vancouver markets, our 2 largest metropolitan areas. Both markets are expected to perform well due to a very low inventory of unsold homes, driving up prices and encouraging new construction, contributing to increased income, spending and employment.

We're also seeing a welcome surge in the start-up businesses in these markets. While the Port of Seattle continued to experience sluggish container volumes, Tacoma and Portland volumes were up for the first quarter. Portland increased about 12% from a year ago, while Tacoma's volume was up 37% year-to-date through March. Much of these increases were due to demand for agricultural and wood products, industrial machinery, furniture, auto parts and electronics. Expectations are for additional growth during the rest of the year.

The Pacific Northwest has done well in population growth for metropolitan areas, which is particularly interesting since low density and affordable housing have pushed most of the population growth in the past decade or so to the Southeast and Texas. The Portland-Vancouver area ranked 18th in the country with population growth of 18.3% over the period of 2000 to 2012. The Seattle-Tacoma-Bellevue area ranked 21st, with 16.4% growth during the same time period.

While the unemployment rate continues to improve, some of the declining rate is due to shrinking labor force, as people stop looking for work or retire. However, the overall economic trend is for an increase in the number of jobs and a falling jobless rate despite a dip at Boeing. The unemployment rate in Washington dropped to 7.3% in March, the lowest rate since December of 2008 well over 4 years ago and almost 3 percentage points below its highest point at 10.2%. That unemployment rate for the Seattle MSA fell to 5.5% in March, considerably lower than the rest of the state. In fact, the area is among the nation's top 10 markets for job growth.

Washington state has recovered over 70% of the jobs lost during the recession. Exports grew a remarkable 45% from 2007 to 2012. The state has the greatest concentration of technology jobs in the U.S. In fact, over 11% of jobs in Washington and are tied to the tech economy more than doubled the national average. The Boeing Company, our region's largest private employer, announced some relatively modest layoffs of assembly line workers due to efficiency gains, as well as engineering employees as its latest jet program shift from development to production. While Boeing continues to ramp up production on their major programs, some programs such as the 787-10 or the 777X are not yet at the point in their development to maintain the current levels of employment. The company predicts the commercial market for aircraft will grow at an annual rate of 4% over the next 2 decades. And we're all happy that the FAA has approved modifications to the 787 battery system, so the planes should be back in the air very soon.

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 $3.1 billion annually in total payroll. Local sales associated with military employment are estimated at nearly $24 billion. The region's active duty military employment is nearly double the national average. Of course, we're very carefully watching the federal budget implications related to the potential downsizing of the military.

The University of Oregon's recent economic indicators report states the pattern of recent improvement in the states, particularly the rebound in housing, suggest the economy will improve further as 2013 progresses. With financing costs low and corporate profits high, a great deal of spending and investment is likely to be unleashed, as soon as the near-term uncertainty is removed. While still high, above the national rate of 7.6%, Oregon's unemployment rate hit its lowest point in 4 years in March, dropping to 8.2%, down from recession high as near 12%.

The professional and business services industry hit record numbers in March, with almost 200,000 jobs, higher than it was in April of 2008 before the recession hit the state. The hospitality and food industry also hit a record high last month with over 152,000 jobs. The industry peaked 5 years ago.

Construction, manufacturing and leisure also did well, exceeding expectations. The manufacturing and services area in Oregon contributed positively to job growth. The economic impact of manufacturing in Oregon outweighs any other state. Nearly 20% of Oregon's gross state product comes from manufacturing, making the state the second in the nation in the economic influence in manufacturing activities. 2 sectors, in particular, wood products and electronics, make notably larger impacts in the state compared to the rest of the nation. Wood products still account for nearly 6% of all manufacturing jobs in the country despite its many years of decline.

The state's high-tech electronics sector is anchored by Intel, Lattice Semiconductor and TriQuint. Despite at still high levels of unemployment, Oregon showed the best growth in state gross domestic product in our region, increasing 14% from 2007 to 2012. Of course, there are always challenges. However, we have a very attractive place to live and operate a business in 1 of the fastest-growing parts of the country. Our workforce is well-educated. We have a long list of world-class companies. We are a center for high-tech activities, software development and Internet commerce, medical research, telecommunications and aircraft design and production. We believe that Pacific Northwest region will continue to help reform the nation as a whole.

As you know, our merger with West Coast Bancorp was completed on April 1. Our strategic plan to integrate Columbia and West Coast has been well underway since last October. With cross-functional teams from both banks playing essential roles, we anticipate a very smooth transition.

Since 2010, we have successfully integrated 5 FDIC-assisted transactions in addition to 6 more traditional bank acquisitions over almost 20-year history. Additionally, we will continue to keep our bankers externally focused with the intent to continue to drive loan growth, expand non-interest income and to develop strong relationships with the customers and prospects, in both our new and legacy markets. Equally as important is our ongoing focus on improving the efficiency of our company without sacrificing our level of customer service.

As you know, our industry faces ever-increasing expenses due to new regulations and compliance requirement. We expect there are broader base over which to spread infrastructure investments will be very helpful in controlling expenses.

To summarize, we're just excited about the opportunities in the months to come, as we continue to build the premier Pacific Northwest community bank.

In a separate press release yesterday, we announced a cash dividend of $0.10 per common share and per common share equivalent for holders of preferred stocks. The dividend will be paid on May 22, 2013 to shareholders of record as of the close of business on May 8. This gets an increase of 25% from the $0.08 regular cash dividend we paid for the same period a year ago, and it represent a dividend yield of 1.91%.

With that, this concludes our prepared comments this afternoon. And as a reminder, Clint Stein, our CFO; Andy McDonald, our Chief Credit Officer; and Mark Nelson, our Chief Operating Officer, are with me to answer your questions. And now, Michelle, will you open the call for questions, please?

Question-and-Answer Session

Operator

[Operator Instructions] You have a question from the line of Joe Morford.

Joe Morford - RBC Capital Markets, LLC, Research Division

I guess, first question would just be on the -- how do you feel about your ability to hold the core operating margin around these levels? Obviously, there's a lot of moving parts having probably some tailwinds from the lower cash balances, having paid down the advances. Yet, at the same time, West Coast is coming in, in a slightly lower level? So just kind of maybe near-term expectations for the margin?

Melanie J. Dressel

Clint?

Clint E. Stein

Yes. It's difficult to really dial that in because there are so many moving pieces. We had less in premium amortization in the investment portfolio this quarter. Some of that was the result of the restructuring that we did in the fourth quarter of last year. So that helped the margin. We had good loan growth, which definitely helped. To the extent that prepayment speeds don't pick up on us and we continue to have loan growth, then the operating NIM should hang in there pretty well. But it's going to go down just as a result of bringing West Coast on. Their first quarter margin was 3.65%. And so, that's going to have a significant impact on what we show for margin because it represents about 1/3 of our assets now.

Joe Morford - RBC Capital Markets, LLC, Research Division

And then, I would imagine a bump-up in the third quarter once you payoff -- you'll get a full quarter benefit of paying off the TruPS and stuff?

Clint E. Stein

Yes, and there will be a little bit. The biggest -- I guess, the biggest benefit that we'll have is just managing our overnight funds much tighter than what we've been able to do as we were moving towards the merger. I mentioned that we were able to put to work $125 million that we kind of had set aside for the TruPS, and those are redeemed and matured and then -- so just with less-than overnight funds, that will have a positive impact on the margin.

Joe Morford - RBC Capital Markets, LLC, Research Division

Okay. And then, the other question was -- I guess, I was just curious what the final credit mark taken on the West Coast portfolio? And given that, how should we think about reserve and provision levels going forward?

Clint E. Stein

Well, it's quite a process, which is why April 1 is -- there's -- it adds a certain element of complexity when you close a merger at the first day of a new quarter, but it gives you the full quarter to work through the valuation process. And so, I actually participated in a call with our valuation providers earlier this morning, and it's a pretty dry subject, listening to the valuation providers. It's a lot like watching paint dry. I hope nobody's listening that's from that firm. But there's a lot involved. And so, those marks are really close. We're going through the review and acceptance of the assumptions and validating those through that process right now. So the marks are still being finalized.

Operator

Your next question is from the line of Aaron Deer.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Actually, my question is a direct follow-up to Joe's. Obviously, these are complicated issues. But I'm just wondering, with the marks on the book as well as purchase accounting in general, if you have any sense at this point, what impact that could have on the margin that you cited that West Coast had in the first quarter here?

Clint E. Stein

Well, if we go under the assumption of what we've disclosed publicly with our initial estimate of approximately a 5% mark, that will help the NIM from a loan standpoint. But the other side of it is that we had to mark their investment portfolio to market and that was a pretty sizable percentage of their assets. And as we've talked over the past several quarters about what our yields on our investment portfolio has done as we continue to reinvest it at current market rates, it's essentially like their whole portfolio was reinvested at today's rates. So that's -- I think that we'll get a pickup on the loan side from the credit marks there, but we'll probably give it up on the investment side. So I think that if you take their margin and you take our operating margin and you factor in the percentage of assets and hold everything else constant and that's probably as good as -- of an estimate as anybody can come up with. But there's just so many variables that loan production is probably the biggest variable. If we're able to reinvest portfolio -- investment portfolio, cash flows in loans, that will obviously help the margin going forward.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then, just to stick with this fun accounting theme, the -- over the past 2 quarters, as you noted earlier, the acquired loan accounting has had a neutral and, I guess, no negative impact on earnings. As you've examined the covered portfolio and kind of weighed the potential losses that are embedded there against the discount compared to the loss share asset, do you have a sense of what we might expect on a net basis in terms of its impact going forward? Should -- as we think about it as just being neutral? Or could it be negative? Or come back to swing back to a positive? Or is it just too hard to judge that?

Clint E. Stein

Well, I think that if we go back and look over the last 3 years, there have been times where it's swung from a negative to a positive impact. There has been a lot of volatility in that, which is why we go through the pain of trying to pull it out and separate it in the tables, so that we have as much visibility around it as possible. With that said, I think that -- for the next several quarters, I think it's going to remain a headwind. I think it will be -- it will probably look a lot like what we experienced this quarter.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

And thanks for adding that table on the release. That's helpful.

Clint E. Stein

Yes. In the -- part of what's driving that is -- in this quarter, we had to implement an new accounting -- some new accounting guidance related to the indemnification asset or the loss-sharing asset, and that's changed the timing of the amortization. So for example, for this quarter, it was $2.5 million. That's really what created the big shift from the fourth quarter.

Operator

Your next question is from the line of Matthew Clark.

Matthew T. Clark - Keefe, Bruyette, & Woods, Inc., Research Division

On the cost saves that you anticipate, it looks like your update on West Coast has been about, I think, $78 million annualized. And I think when you guys originally announced the deal, it was $86 million. I'm just curious. It seems like they've done some of the heavy lifting for you but are you still also committed maybe to the original cost save target in terms of dollars that might give you a little bit more than you might have thought?

Melanie J. Dressel

Well, I think, that we've said all along that, yes, we are definitely committed, Matt, to hitting the cost save mark. And you're also right that West Coast had done some pretty heavy lifting before we even signed the definitive agreement. And that's the reason why we've been cautious about encouraging anybody to think in terms of more cost saves just because they had closed some branches and reduced staff in certain areas that you normally would have done in the early stages of an acquisition.

Clint E. Stein

Let me add to that, Matt. A lot of the cost save estimates were developed in coordination and collaboration with West Coast, and they knew the initiatives that they had coming that have resulted in the improved run rate that you noted. So a lot of that would have been contemplated. It was at about this time last year when those cost saves were annualized. And so, the improvement over that time period, I don't think that we're saying that we can -- that -- from April 1, it was when we were going to achieve the $21 million of cost saves. It's really been from the time that we did our analysis, what was the run rate, and that's what we're committed to.

Matthew T. Clark - Keefe, Bruyette, & Woods, Inc., Research Division

Got it, got it. And then, on the loan portfolio and the related growth. This quarter, I believe, is -- tends to be a little bit seasonally slower for you like everybody else with the pay-downs in ag and so forth. I guess, I'm just curious how you think about growth from here. Would you -- can you talk about the pipeline, and whether or not you might see more activity than you might have thought 1 quarter ago?

Melanie J. Dressel

Mark?

Mark W. Nelson

Yes. Hello, Matt. This is Mark Nelson. Yes, we came into the year with a really strong pipeline and some carryover of closings, et cetera, from the end of the year. And while that helped us a bit in January, February was a rebuilding time. We had a really strong March. And our pipelines continued to be strong. The only thing I can really say is it's really a competitive market, and it's getting more competitive. We're seeing a lot of concessions on rates and on credit covenants. Both Andy and I are being pretty conservative on that kind of thing because we just don't see enough pricing there to justify additional credit risks. So we're certainly diligent about that. Having said that, our growth is coming through all of our business lines. We're seeing it in retail. We're seeing it on our wealth management and professional lending groups and especially seeing it more broadly in our commercial and commercial real estate. So I would certainly be cautious to automatically assume that we're going to have tremendous growth rates throughout the year, but our folks have really been focused and hitting the ground running, and we worked to -- with our West Coast partners to get them up and running and having all the tools they need in place from day 1. So we're working hard to do the best we can.

Matthew T. Clark - Keefe, Bruyette, & Woods, Inc., Research Division

And I guess, on -- with West Coast being kind of flattish for a while now, I assume there's some pent-up demand there. Is there any -- I guess, how do you -- what are you hearing from them, in your ability to combine and go after maybe more business or bigger business?

Mark W. Nelson

Well, we aren't just arbitrarily going out and looking at bigger business, maybe larger than what they've been looking at the first -- the last few years. But, yes, they're clearly -- I think we're in a better position to take care of our clients in Oregon, not only on the lending side but with all the other services that we're bringing to the table there. And I will certainly be able to address any issues their existing customers have had. And clearly, I think our biggest challenge will be to make sure that we're looking outwards and looking for opportunities to build our business now that we've got the organizations together and integrated.

Operator

Your next question is from the line of Jeff Rulis.

Jeffrey Rulis - D.A. Davidson & Co., Research Division

The -- I guess, a question maybe for Clint. On the -- I just wanted an update on the merger cost in general, I guess, if there's an updated number based on what you've seen in Q4 and in Q1, and if that number has changed at all, or what's remaining.

Clint E. Stein

Well, in terms of the absolute number, that hasn't changed. And as we've talked, it will take us some time to -- we talked about internally. Many of them have been identified. Mark and I [indiscernible] have discussion pretty much every week on this topic, as Mark is leading the integration. But -- so we feel really good about the number that we put out there. But in terms of realizing those, we have to go through the integration process, and that's going to take us the next couple of quarters. And then, once that's complete, then we'll validate that we achieved what we expect to achieve and what we modeled when we announced the transaction.

Jeffrey Rulis - D.A. Davidson & Co., Research Division

Just to clarify, Clint, we're talking about the merger cost out of onetime. It was a $30 million figure.

Clint E. Stein

I guess, I did my Alan Greenspan and answered the question I wanted to answer. Sorry about that, Jeff.

Jeffrey Rulis - D.A. Davidson & Co., Research Division

No problem.

Clint E. Stein

So in terms of the merger cost, right now, we do think that -- I mean, we're obviously tracking that, and we included a new line item. So that's going to make it easier on you when you're updating your models to see what it's done on a quarterly basis because it will span 5 or 6 quarters in order to have a significant impact. To the absolute number, I still feel like we're about -- pretty good estimate. There's -- a lot of the expenses is ahead of us still, obviously. We'll see quite a bit of it in the second quarter here, and then we'll see more of it in the third quarter, as we move through the systems conversion phase. But the $30 million that we estimated, we haven't refreshed that number. We've visited it, but we haven't refreshed it because we still feel like that that's a pretty good estimate for us.

Jeffrey Rulis - D.A. Davidson & Co., Research Division

Okay. So the, say, $28 million remaining is ballpark?

Clint E. Stein

Yes.

Jeffrey Rulis - D.A. Davidson & Co., Research Division

Okay. And, Melanie, a question on capital pro forma. Has that number been updated in terms of what capital looks like pro forma? And then, if you could comment on what do you feel like that's in excess to where you'd be comfortable going in terms of usage going forward? How much surplus do you think is in that pro forma number?

Melanie J. Dressel

The pro forma is still a little bit north of 14%. Our tangible common equity would be about 9.3%, but -- which -- last quarter, I would have said is about [indiscernible] but we'd rather be at around 12% on a going forward basis. But I would also share with you that I was in Washington D.C. last week and meeting with the ABA, and there are proposals in the works that I think we all need to monitor a little bit more that are going to recommend that banks carry capital in the 13% to 14% level, which -- certainly, we hope that, that is not the case. But we may want to run a little bit higher than we normally feel comfortable with if we had our own magic wand, just letting them sort through that. But 12% total risk-based capital would be our goal, everything taken into consideration except that.

Jeffrey Rulis - D.A. Davidson & Co., Research Division

And then, just a follow-on to that would be -- I guess, what options would you consider if you do have some excess capital? I mean, maybe prioritize what sounds the best in terms of, like, a buyback, a dividend, regular increase or perhaps a special dividend. Is -- could you maybe prioritize what sounds -- in terms of 1, 2, 3 or something like that?

Melanie J. Dressel

Well, at the top of my list would be great loan growth. That's how I'd really like to utilize our capital. Really, it's difficult to prioritize that because we've really asked ourselves all the time what the landscape looks like out there. And clearly, if there was not an opportunity to deploy the capital through an acquisition or loan growth or something like that, then we'd start looking at the other means of returns other than the capital to the shareholders. I don't think that we're at a point where we can realistically make that assessment.

Operator

Your next question is from the line of Brett Rabatin.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Wanted to get a little color around -- it sounds like maybe you're more optimistic on the economy in your area vis-à-vis maybe than what we were talking about earlier in the quarter. Can you just -- I know you gave a lot of commentary in your prepared comments about Boeing and some other things. But can you just give us kind of your thoughts on if we're headed for improvement? Obviously, your loan growth in the quarter would suggest things improved through the quarter.

Melanie J. Dressel

Yes. I would have to say that I am much more optimistic this quarter than I was last quarter just in talking with our business customers and getting feedback from our business customers. But we've also had some great growth in our market just in terms of new businesses coming to the area. I think the rise in port activity is a good indicator that things are improving as well. We just had an announcement last week that State Farm is going to be increasing employment dramatically in the Pierce County market here, where we're headquartered. But there's just a general feeling when you talk with business owners that they feel as though the economy is really taking a turn for the better. But that is always offset by their not wanting to hire a lot more people. They really like to make capital investments in those things that just makes them more efficient. And it's really more around the cost of healthcare and benefits for employees that's causing them to be cautious.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Okay. And then, I was hoping to get maybe a little more color around the commentary around loan pricing. And it sounds like maybe things have gotten a little more competitive. Any thoughts on, like, a linked quarter change in basis points, in terms of what you're seeing on commercial real estate, CNI, from a landscape perspective?

Melanie J. Dressel

Mark?

Mark W. Nelson

Commercial real estate is probably, by far, the most competitive out there. I guess, I hadn't given a lot of thought to where it was versus where it is today. You get some of the majors out there, and you see some LIBOR plus 200 basis point stuff. That's pretty hard to justify, and we don't focus on a lot of that. So if you just threw a number out, maybe 25 basis points compression might be where the market is headed over the last quarter. Andy, I don't know -- from a credit administration side, he sees some things I don't. So I don't know if you have any other comments.

Andrew L. McDonald

Yes. I think that -- I think 25 basis points in the quarter might be a little bit aggressive. But certainly, you're seeing a lot of fixed rate sub-4% -- some people are going out as far as 10 years. We tend to shy away from that. I think for strong borrowers that are larger, a little bit more sophisticated, LIBOR plus 250 -- 200 to 250. We used to be probably LIBOR 250 to 275, and that's probably where Mark's thinking of that quarter.

Operator

Your next question is from the line of Jacque Chimera.

Jacquelynne Chimera - Keefe, Bruyette, & Woods, Inc., Research Division

Most of my questions have already been answered. I have just a few little housekeeping items. The first one actually is for Clint. On the amortization schedule that happened during the quarter, the $2.5 million, is that going to make any sort of a noticeable impact on what's remaining over the next couple of quarters for the indemnification asset?

Clint E. Stein

Yes, all things being equal, it will. And what I mean by that is, to the extent that we don't have impairment in the portfolios that are then offset that scheduled amortization, then it would. It would amortize it down. And it gets -- it diminishes slightly during each quarter, but it still stays at a pretty consistent level with what you saw in the first quarter.

Jacquelynne Chimera - Keefe, Bruyette, & Woods, Inc., Research Division

So that $2.5 million in the first quarter will be mirrored in the future quarters all else equal. It will be a higher rate on a declining basis? Am I understanding that correctly?

Clint E. Stein

Well, it will be a little less. It will be a little less than $2.5 million. It'll -- the actual amount of amortization related to that will decrease with each month, each quarter. But -- so for the year, it's going to be all things being equal, probably $9.5 million where if you just took the first quarter, annualized it, it would suggest $10 million. So that's why I said it gets a little less, but still, for all material purposes, is pretty consistent with what we saw in the first quarter.

Jacquelynne Chimera - Keefe, Bruyette, & Woods, Inc., Research Division

And then, I apologize if I missed it, sorry, in your earlier NIM discussion. But when does the remaining $50 million or so in borrowings that you'll be waiting to mature from West Coast, when does that expire?

Clint E. Stein

They're all 2013 maturities. June through December.

Operator

[Operator Instructions] And I'm showing there are no further questions at this time.

Melanie J. Dressel

Okay. Well, thanks, everyone, and we'll talk to you next quarter.

Operator

And this does conclude today's conference call. You may now disconnect.

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