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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

Analysts

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

Joe Morford - RBC Capital Markets, LLC, Research Division

Matthew T. Clark - Crédit Suisse AG, Research Division

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

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

Columbia Banking System (COLB) Q4 2013 Earnings Call January 23, 2014 4:00 PM ET

Operator

Ladies and gentlemen, thanks you for by standing by. Welcome to Columbia Banking System's Fourth Quarter and Full 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 Systems.

Melanie J. Dressel

Thanks, Keisha. Good afternoon, everyone, and thank you for joining us on today's call to discuss our strong fourth quarter and full year 2013 results. I hope you've all had a chance to review our earnings press release, which we issued earlier today. The release is also available on our website, columbiabank.com.

Of course, our results reflect our acquisition of West Coast Bancorp, which was completed on April 1 of last year. And at the end of the year, we were operating a total of 142 branches, 80 in Washington and 62 in Oregon after consolidation of overlapping branch locations. We were happy to report that after just 3 quarters, we have exceeded our estimate for earnings accretion for the first full year. We also recorded a record $240 million in loan production during the fourth quarter as our bank was focused on new and prospective customers and our credit metrics continued to improve.

This morning, we also announced an increased cash dividend of $0.12 per common share. It will be paid on February 19 to shareholders of record as of the close of business on February 5, 2014. The $0.12 cash dividend represents a 9% increase over the dividend paid for the prior quarter and 20% from the same period a year ago. Clint Stein, Columbia's Chief Financial Officer, is also on the call with me today. He will begin our call by providing details of our earnings performance for the quarter, including the financial impact of the West Coast acquisition. Andy McDonald, our Chief Credit Officer, will also be speaking this afternoon. He'll review our loan production, our credit quality information, as well as our allowance for loan losses. I will conclude by giving you our thoughts on the economy here in the Pacific Northwest and an update on the ongoing integration of West Coast Bancorp, and then we'll 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. And for a full discussion of the risks and the 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'll turn the call over to Clint to talk about our financial performance.

Clint E. Stein

Thank you, Melanie. Our fourth quarter results reflect a continuation of our effort and progress on the West Coast integration as well as the factors leading to the improvement in our operating leverage that we have discussed on the last few earnings calls. However, it wasn't all just about integration and efficiency initiatives during both the quarter and the year. Our retail, commercial and private bankers had record production and loan originations and wealth management fee income for the year. Their collective efforts had a tremendous impact on our financial performance.

We reported fourth quarter earnings of $20 million or $0.38 per diluted common share. Our reported fourth quarter earnings were negatively impacted by $7.9 million in pretax acquisition-related expense and $1.2 million of 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 $0.015. These 2 items combined to lower earnings by $0.11.

However, there were also some items in the quarter that had a positive impact on reported earnings. We released provision from both the originated and acquired loan reserves, the pretax provision recapture of $3.7 million increased earnings per share by $0.05. In addition, we had miscellaneous year-end expense and tax-related accrual adjustments and other onetime items that increased reported earnings by $0.03 per share.

I just threw a lot of numbers out, so to recap, we reported diluted earnings per share of $0.38, and that number included $0.11 of drag from acquisition-related expense and FDIC loan accounting, but it also included $0.08 worth of tailwind from the provision recapture, year-end accrual adjustments and other onetime items.

Net interest income for the fourth quarter was $77.2 million, down $3.2 million from $80.4 million in the prior quarter. The decline was centered in loans and mostly due to the loan -- to the lower discount accretion income during the current quarter. Interest income on loans was down $4.8 million on a sequential quarter basis with $4 million of the decline related to lower discount accretion income. Noninterest income before the change in FDIC loss-sharing asset was $20.2 million in the current quarter, up $735,000 from the third quarter. The increase was due to higher service charge and merchant services fees, which were up $483,000 and $808,000, respectively, over the prior quarter. These increases were tempered by a $612,000 linked-quarter decline and other noninterest income, primarily related to lower fees on SBA and mortgage loan sales activity.

Total noninterest expense was $63.6 million for the current quarter. Our reported noninterest expense was negatively impacted by the previously mentioned $7.9 million in acquisition-related expense, which was partially offset by $1.3 million in net benefit from OREO and OPPO. After taking these items into consideration along with the change in the FDIC clawback liability, our noninterest expense run rate for the fourth quarter was $57 million, down from $58.1 million on the same basis during the third quarter.

The West Coast integration continues to progress nicely. Our previously stated expectation of $30 million in acquisition-related expenses remains our best estimate. During 2013, we recorded $25.5 million in acquisition-related expense, and to date, we have incurred $27.3 million. With less than $3 million of acquisition-related expense remaining to be recognized, the impact to reported earnings in future quarters will obviously be significantly less than the last 3 quarters. We have identified 100% of the projected annualized cost savings with 90% implemented by the end of the fourth quarter. The remaining cost savings will be realized over the next several quarters.

We continue to pursue initiatives that will improve our operating efficiency through the combination of increased revenues and lower expenses. At year end, we had 142 branches, down from the combined 159 branches in September 2012 when we announced the West Coast acquisition. However, there are some operational areas that are creating headwinds as we work toward lowering our noninterest expense run rate. An example is regulatory compliance costs, which continue to escalate. In addition, we continue to build the infrastructure and systems to support substantial future growth. The operating net interest margin declined 10 basis points from the third quarter to 4.31% but is up 17 basis points when compared to the fourth quarter of 2012. The decline in the operating NIM during the fourth quarter is a result of growth in the securities portfolio at lower yields than loans coupled with current period loan originations at rates that were lower than the average portfolio rate. The reported net interest margin declined 34 basis points on a linked-quarter basis but is only down 12 basis points from the same period last year. The decrease in the current quarter is largely the result of lower discount accretion on the acquired loan portfolios. On a linked-quarter basis, average interest-earning asset yields decreased 35 basis points to 5.1% during the current quarter. The decrease in yield was driven primarily by the decline in the discount accretion on acquired loans. The investment portfolio continues to benefit from slower mortgage prepayment speeds coupled with higher reinvestment rates. The yield on the investment portfolio increased 17 basis points to 2.49% during the fourth quarter. The duration of the portfolio at December 31 remains approximately 4.

Our average cost in interest-bearing deposits for the current quarter was 9 basis points, down from 10 basis points in the prior quarter. Our cost of total deposits for the quarter held steady at just 6 basis points. When compared to the third quarter, period-end noncovered loan totals were up modestly for the fourth quarter, increasing roughly $26 million. However, production activity was substantially higher than the past 2 quarters. We originated over $240 million in loans compared to roughly $190 million in the prior 2 quarters. In a few moments, Andy will review the specific factors that impacted our period-end totals.

Our effective tax rate for the fourth quarter was 28%. We expect a 2014 effective tax rate that approximates our full year 2013 effective tax rate of 31%. Last, tangible book value per common share increased from $13.08 at the end of the third quarter to $13.30 at year end, and our tangible common equity to tangible assets ratio was 10.04%. Now I'll turn the call over to Andy to discuss the credit performance.

Andrew L. McDonald

Thanks, Clint. During the quarter, our noncovered loan portfolio showed modest growth in loans, primarily centered in multi-family and commercial Real Estate term loans. Growth in this segment essentially offset contraction in Commercial business loans and consumer loans. Growth in commercial Real Estate term loans was centered primarily in owner-occupied properties, which accounts for approximately $25 million of the $31 million increase in this classification. Growth was centered in agricultural land, manufacturing facilities and warehouses. Growth in income property loans was centered in warehouses and hospitality properties.

We continued to enjoy strong credit statistics in this classification as our average debt service coverage ratio was 1.68 and our average loan to value was 58% in 2013. Certainly for 2013, commercial Real Estate term loans was an area of solid growth. I would note that we did see a modest contraction in commercial Real Estate construction loans during the quarter, but most of this was by design as we had over $18 million in construction projects pay off during the quarter. Most were taken out by long-term loans from Fannie Mae or by life insurance companies while others were constructed on a presold basis, and upon completion, were purchased by large income property investors who had already had permanent financing arranged ahead of time. However, thanks to new origination activity and draws on existing facilities, the classification only declined by $1.7 million. So for the quarter and the full year, we are very pleased with how this classification performed.

The reduction in Commercial business loans was primarily due to seasonal contraction in the agricultural, forest and fishing segment plus seasonal contraction in our contractor sectors. Lower line utilization within our wholesale sector also muted Commercial business loans. I should note that the contraction in the ag, forest and fish alone was $26 million. Over the past couple of years, we have enjoyed continued growth in this sector, and as a result, it's beginning to have a more seasonal effect on our Commercial business loan totals. Ag, forest and fish is now our second largest sector within the Commercial business loan classification, followed by finance and insurance, then manufacturing, and contractors. The contractor segment also was impacted by the seasonal nature of the construction market and declined $15 million during the quarter. This was predominantly associated with pay-downs on line of credit balances as we saw a noticeable decline in line utilization in this sector.

Healthcare and social services, of course, remains the largest sector within our Commercial business loan classification and has been for several years. This segment continues to enjoy modest growth each quarter, and the fourth quarter of 2013 was no exception. The covered portfolio continued to contract declining by $34 million before discounts and loan loss provisions or $24 million net of these items. During the quarter, we resolved approximately $12 million in problem-covered loans. For the full year, we resolved close to $60 million in problem loans and have approximately $46 million left in what would normally be considered nonperforming loans if not for the accounting treatment for acquired impaired loans. So we are well positioned to deal with the issues before loss share begins to expire in January of 2015.

Nonperforming assets continued their decline this past quarter and now represent 0.84% of our noncovered assets. As noted in our press release, the reduction in NPAs was muted by our decision to pay off $3.6 million of third-party liens on existing OREO properties. The decision to do so was based on management's estimation that recoveries on previously charged off loans will be greater by doing so.

As of the end of the quarter, we had approximately $12.3 million in recorded investment in TDRs of which about $800,000 is included in the NPA category. This means we have an $11.5 million in performing TDRs. For the quarter, the company had a provision recapture of $2.1 million for noncovered loans; $500,000 was associated with the originated loan portfolio; $800,000 was associated with the discounted Bank of Whitman portfolio; and $800,000 was associated with the discounted West Coast Bank portfolio. The provision recapture, as discussed in the press release, was due to continued positive migration within the various loan portfolios as loans are either worked up or worked out of the bank; declining loss rates, as evidenced by the decline in net charge-offs year-over-year as well as for the past several years; and finally, we recorded recoveries within the discounted portfolio that exceeded our expectations. The combination of these factors resulted in the $2.1 million recapture. Past-due loans at quarter end were 57 basis points compared to last quarter when they were 39. With that, I'll turn the call back over to Melanie.

Melanie J. Dressel

Thanks, Andy. The economic trends continue to be positive here in the Pacific Northwest with slow-but-steady improvement. As we've seen some recovery begin, our Metropolitan areas of Seattle-Tacoma-Bellevue as well as Portland-Vancouver are leading the way, outpacing the rest of Washington and Oregon as a whole. This gradual recovery is impacted by the relative lingering weakness in the labor market, which indicates that the recovery is probably not yet complete. However, unemployment rates are declining. Washington's unemployment rate for December was a 5-year low at 6.6%, a decrease from 6.8% in November and 7.5% from the same period last year.

The last time joblessness across the state was lower was in November of 2008 when it stood at 6.5%. Washington gained almost 42,000 jobs in 2013 with 4,400 added in December. Employment has been slowly increasing in most sectors with the exception of the federal government and aerospace. While volume accounted for about 1/3 of our region's postrecession job growth, they are no longer in a hiring mode. We will relate that the Boeing machinists voted to accept the company's 8-year contract offer earlier this month, which will keep the final assembly in wing fabrication of the 777X here in Washington state. Even excluding the military's new refueling tanker, Boeing has over 7 years of commercial orders on its book, and their 2013 jet sales were the second highest in the company's history.

Aerospace jobs are down about 2,300 compared with the year ago, a 2.5% decline, while the federal government jobs in the Puget Sound area are off by about 2.6%. Still, the Seattle area unemployment rate was just 5.3% in December. Employment numbers have reached prerecessionary levels, and this region continues to generate about half of the jobs in the state. Washington's exports statewide are nearly 9% year-to-date -- are up nearly 9% year-to-date through to third quarter, continuing a good pattern of growth for the past 2 years. The Port of Tacoma is anticipating 8% growth in container volume this year.

There's been strong growth in existing home sales in Washington, including in Spokane and Pierce counties, both with year-over-year increases of over 35%. While single-family housing permits have weakened, home prices continue to rise. Oregon is among the top 10 in the country for the fastest job growth. We saw the number of jobs increase by over 36,000, more than 2% over the past year. Oregon's unemployment rate is also the lowest that it's been in more than 5 years improving to 7% in December, down from 7.3% the prior month and 8.3% a year ago. The high-tech sector is continuing to show consistent strength primarily due to Intel's ongoing fabrication facility expansion. Manufacturing also continues to power Oregon's economy. The state's manufacturing outlet is the 10th highest in the country, about 70% of which is in the computer and electronic products area.

Publicly traded companies in Oregon had a banner year. The Bloomberg Oregonian Index of publicly traded companies in Oregon and Southwest Washington outperformed the major stock market indices, reflecting an improved economy and consumer confidence. The index finished the year up just under 52% adjusted per dividend. That's up from an increase of 14% in 2012 and a 3% decline back in 2011. The collective market capitalization of its members is $126 million today, up from $44.6 million in 2008.

To summarize, we're feeling increasingly optimistic as the economy continues its steady improvement here in the Pacific Northwest.

As I mentioned at the beginning of the call and Clint covered in more detail, we're really pleased with the earnings accretion of the West Coast merger, which more than exceeded our expectation. Thus, the successful integration has been more than financial. Of course, our cross-functional teams have done a wonderful job executing our strategic plan. And throughout our entire footprint, our record loan production occurred during the year and was a result of our bankers' external focus on both our existing and prospective customers. Our focus for 2014 will be on quality loan growth, completing the full integration in West Coast to further leverage this investment, as well as consider strategic and accretive acquisitions. We feel very positive about our future as we continue to move toward fulfillment of our mission to become a premier Pacific Northwest regional community bank. And finally, I'd just like to add, go Seahawks. With that, this concludes our prepared comments this afternoon. And as a reminder, we have Clint Stein and Andy McDonald with me here to answer your question. And now, Keisha, you can open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Jackie Chimera.

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

I had a question, Melanie. If you could just dive in. I know that the Boeing vote was resolved positively, but how is consumer confidence up in the region there after all the back and forth?

Melanie J. Dressel

Well, I'd say that it's a lot higher than it was before the final vote. There was a lot of concern. And it wasn't just consumer confidence. I would say that it was business confidence as well. As we surveyed our business customers in the fourth quarter, we again saw a slump in confidence with businesses. And it's kind of a continuing theme of what we saw throughout the year. And that was just a reluctance to hire more people. And as we all know, until businesses begin to hire more, it's still going to be a little bit of a rocky road for the economic recovery. But still, really pleased with the progress that our region made in the fourth quarter.

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

Do you think that, that confidence will bounce back now that the contract is locked in?

Melanie J. Dressel

I think that that's a portion of it. But people are still talking about what's going to happen at the federal level. And every time that there's any kind of an announcement on layoffs, on -- that seems to resonate a lot with people, just wondering what's going to happen with their jobs. But it was a decent retail holiday shopping period. People, I think -- that probably says more than anything about the confidence. And I'm talking about what we all read and thought about here in the Pacific Northwest.

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

And looking to the pay-downs that you had in the quarter, was that all seasonal or was there just some extraneous factors going on there, too?

Melanie J. Dressel

A little bit of both. And I'll let Andy respond to that question directly.

Andrew L. McDonald

Yes, as I detailed in my remarks, we had about -- really, the ag issue is going to become something that we're going to see more and more of as we continue to have success in that segment. But consumers are -- a good way to look at it. For the quarter, our consumer loans were down about $5 million. But when you kind of dig down underneath the numbers, we had about a $15 million pay-down on our consumer secured Real Estate loans, HELOCs and whatnot. So we only had about $5 million that actually paid off. So the rate at which we have seen the refinancing activity impacting that portfolio has declined quite a bit as I think most everybody's getting done refinancing. But to offset that, we really had to originate quite a bit of loans to get to just a $5 million net reduction. So in a sense for the quarter, we originated 5.5% loan growth. It just got muted by people refinancing to get cheaper rates and really, basically paying down their lines of credit. We didn't actually lose their line of credit business. They've just chosen to put that on a long-term mortgage. So we'll probably capture that back. I'm confident that consumers will continue to spend.

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

They always do. And then just lastly, as in the past that there's been a lot of market share taking, are you seeing development of new demand as economic activity improves?

Melanie J. Dressel

You want to talk?

Andrew L. McDonald

Yes, I would say that a lot of the real estate activity that drove the growth in commercial Real Estate term loans, a lot of that was refi activity. But some of it was new as evidenced in the construction bucket. And you certainly had segments like multifamily that were pretty strong. And we have seen, as evidenced in the fourth quarter, a pickup in people who own their own businesses deciding to do expansion, either in the warehouse, distribution facilities or office properties. So I think there is getting to be a pickup in business investment. And I think that also bodes well when you're kind of looking at the economy in the Pacific Northwest now that we have the Boeing thing behind us. A lot of those people are going to start to gear up for the production that's going to come.

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

And would I -- if I'm assuming that, that will then lead to higher utilization rates as well, would that be kind of accurate?

Andrew L. McDonald

I would hope so. I think that our utilization rates for the entire bank remain relatively even for the quarter. We did see a bounceback in our finance in the industry segments, which kind of help offset a little bit what happened, for example, in our wholesalers. So I'm just not sure. I think that people -- right now, banks are aggressive and may be offering commitments a little bit larger than what companies really need, and that could mute utilization. But I think that, overall, line of credit balances will go up. I'm not necessarily sure that utilization rates will go up.

Operator

And your next question comes from Joe Morford.

Joe Morford - RBC Capital Markets, LLC, Research Division

I guess I was just -- wanted to better understand the decline in the Col [ph] margin this quarter from 4.41% to 4.31%. It sounds like it was really, kind of the yields on the new loans coming in at lower spreads than what's on the books. And has pricing actually gotten worse than your markets, or are you just willing to compete more now as evidenced by the increased production numbers?

Melanie J. Dressel

Clint?

Clint E. Stein

Well, I'll talk about the first part of that, and then let Andy jump in on the competing piece of it. But really, it's a combination of, I think, loan -- our average loan coupon rate for the portfolio was down 7 basis points from the third quarter. I think that some of that can be a little bit misleading. We're doing LIBOR-based stuff that will reap the benefit on the way up. But in terms of the margin, we had a shift -- the majority of the growth in earning assets was centered in the investment portfolio. And while we're able to get low to mid 2s in the portfolio for mortgage-type securities, we're starting to get over 4% now with taxable equivalent on the muni stuff that we're doing. It still isn't what we can do in the loan portfolio and it's still at rates that are lower than the margin. And so from that perspective, it's that asset mix that shifted, drove the margin down. I'll turn it over to Andy to talk about what we're doing versus the production and competitiveness there on the rate side.

Andrew L. McDonald

Yes, you bet. A couple of things that are occurring on the production side. One is, obviously, a lot of our loans that enjoy higher rates are loans that are either getting repriced at a lower rate or, alternatively, we might be getting paid off on those loans if a competitor offers a rate that we're not willing to accept. So for example, we see a lot of loans that are north of 5% now that, to retain that business, we're pricing somewhere in the 4.25% maybe 4.50% range, depending on the tenor of the transaction. And then in addition to that, since our existing portfolio is priced at the 4.5% to 5% range, excluding the ones that I talked about earlier, we're bringing in new stuff at 4.25% to 4.5% or sometimes lower than that. So you've got a little bit of repricing within the loan portfolio as well as the new originations coming in at rates lower than what the loans currently in the portfolio are at.

Joe Morford - RBC Capital Markets, LLC, Research Division

Okay. That's helpful. So I guess then if, looking forward, is it reasonable to expect that we should see some continued pressure or declines in that core margin from this 4.31% level but perhaps at a slower pace with the thought that you may be -- you see a little bit of loan growth because of less pay-downs and less growth in investments relative so that mix improvement is a little better?

Melanie J. Dressel

Clint?

Clint E. Stein

Yes, I think that's a fair assessment. I mean, it really comes down to if we're able to get a little better mix with the loan growth, then it will help the margin. But if it's the status quo of what we had this quarter, then there could be some modest downward pressure.

Operator

And our next question comes from Matthew Clark.

Matthew T. Clark - Crédit Suisse AG, Research Division

First on the -- I guess, the drag from the FDIC accounting. Clint, maybe -- can you give us some sense for how that might change over time? I mean, are we going to see less drag going forward? Are we going to see that reverse course this year?

Clint E. Stein

One of the things that we had, we were running around $3 million in terms of that drag during the last several quarters. And then this quarter, it was just a little over $1 million, and so it was down quite a bit. Some of that's just related to the timing of cash flows that we get. And the carry value of the loans that those cash flows are associated with will give us more accretion income. But I think that -- I guess where I would look at it going forward, and of course it's a bit of a moving target because we reforecast our cash flows on these portfolios every quarter, it continues to become a smaller part of the balance sheet. I think that, all things being equal as it continues to be -- decline, then the drag will decline. But during 2014, we still have considerable amortization on the loss-sharing asset. We're -- we'll still have pretty good discount accretion as well. So I guess it's kind of -- without opening up our model to you, it's a little bit of a difficult question to give you a lot of guidance on. But I would just take the activity that you've seen throughout the course of 2013, adjust it for the percentage or rate of decline in the covered loans, and that's probably what you're going to see for next year. The other thing is the amortization of the loss-sharing asset. We're on the backside of the bell curve, if you will. And so we should see that continue to decline each quarter as we progress through the year. And then beginning in 2015, we should see a fairly substantial dropoff in that because most of the -- I'd say about half of the amortization that we've projected for 2014 is related to the Columbia River and American Marine Bank loss-share agreements that expire. So then, we'll just have the accretion income on the loans absent the loss-share asset amortization that reduces that. Does that help?

Matthew T. Clark - Crédit Suisse AG, Research Division

Okay. I think -- yes, it does. Can you help update us on the amount of accretion you're expecting, I guess, for '14 and '15? I think you've done that in the past.

Clint E. Stein

Yes, I have. Once again, subject to our quarterly reforecasting of cash flows, we would expect about $37 million of accretion income on the FDIC portfolios for 2014 dropping to roughly $23 million in 2015. And then it trails off to $12 million to $13 million in 2016.

Matthew T. Clark - Crédit Suisse AG, Research Division

Okay. Okay, great. And then on the -- on expenses, I think you had mentioned $57 million as a good run rate, x the favorable OREO account. Can you, I guess, update us on how you think that run rate can fare going forward? You still have, I guess, some additional cost saves, not much, but -- and you're also, I guess, are reinvesting for -- on the reg front and infrastructure. I'm just trying to get a better sense for how that run rate might look over time?

Clint E. Stein

We still have a -- so $57 million is a good base run rate for this last quarter. When we take the quarterly -- the annualized cost savings yet to be realized based on modeling, it's a little over $500,000 quarter. So it's a couple million a year. So all things being equal, that gets us to, say, $56.5 million. One of the things that always hits us in the first quarter that creates a bit of a headwind is if we end up with payroll taxes and a lot of merit increases and a lot of those kinds of things. And so we'll have to do our work to find offsets to those types of things. I guess, if you think about a run rate going forward, I would say that $56.5 million reflects what we've done in terms of filling out some of the infrastructure that I briefly mentioned during my remarks. And obviously, compliance is an area of tremendous focus in the whole industry, and so we've invested heavily in that area. We've talked about that when we did our modeling 7 quarters ago for the West Coast transaction that we would be at $55 million. That's still a goal. But it is a challenge because we need to balance it with investing for future growth and the systems and the people and the processes that we feel like we'll need to continue to grow well into the future.

Matthew T. Clark - Crédit Suisse AG, Research Division

Okay. And then if I may, one more. Just on the success you've had on the OREO front. I mean, that's been a consistent trend, the recoveries there. Negative provision, the last couple of quarters, I think, as well. Is it fair to assume that the work out -- on the workout front that things are still -- you're getting ahead of things a little bit better than -- So I guess, is that expected to continue is my question.

Melanie J. Dressel

Andy?

Andrew L. McDonald

Yes. We've been fortunate. Certainly, the bounceback in the real estate market has helped as we now are able to sell properties used at a price higher than we had to charge them down. That's kind of the game there. And in the Pacific Northwest, a lot of the lots and land, which were really laggard kind of properties that nobody wanted, all of a sudden became very popular in late 2012 and throughout 2013 as investors could see that they could acquire these assets at pretty good prices. So I would continue to think that we will enjoy some success on the lots and land. But our OREO properties, in general, are getting down to the smaller kind of the stuff that isn't as vanilla, and that will make it a little bit more difficult to realize the same level of gains in 2014 as we did in 2012 and 2013. Because the stuff that was really flying off the shelf in those periods was really the stuff that, in some ways, is the easier things to sell. But we still have some good stuff out there, and I expect that our OREO expenses will continue to be muted.

Operator

Our next question comes from Brett Rabatin.

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

I wanted to ask maybe a little more on efficiency. And just thinking about -- I know you guys have like 142 branches. Are there any initiatives, major initiatives that are in place to kind of offset some of the things that Clint was mentioning earlier about investment and infrastructure that could possibly improve the efficiency ratio at a more rapid pace, like over the next few quarters, or am I sort of thinking about things right and that things will kind tweak downward as your revenue grows?

Melanie J. Dressel

Well, I think, that, yes, we have several initiatives that we're working on. And this is the first time in quite a while that we're not in the midst of trying to put together a core conversion or the major aspects of planning for a broader integration. So that gives us not only the time but the resources to be able to really concentrate more fully on those kind of things. I don't, and I certainly wouldn't expect some major announcement about multiple branch closings or anything like that. We consistently review all of our branches for are they meeting our expectations and adding value to the company? And if not, how can we then improve their performance? So that's just an ongoing sort of thing. But I would say that would be more a matter of just continually improving. The wildcard continues to be the expense associated with the compliance area. And our compliance team is doing a fabulous job. They're very aware of wanting to really maximize the utilization of technical tools to be able to do some of the work. But compliance is just going to continue to be a very, very big part of our industry. So that's always going to be something that needs to be offset. And our whole staff recognizes that and continues to be involved in identifying initiatives that would help us to become more efficient.

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

Okay, that's good color. And the other thing I was just curious about was -- I know I asked this last quarter and it sort of happened again with payoffs affecting the strong production that you have had this year, but is there any visibility of -- I guess you've -- Clint sort of mentioned earlier some of the people having refinanced or what have you in the consumer book, maybe that should be somewhat finished, but is there any visibility that maybe the payoffs from here will stem in terms of what you might have maturing or what you have that you might think could possibly refi somewhere else?

Melanie J. Dressel

Andy?

Andrew L. McDonald

Well, certainly we've seen the refi activity in the consumer area. That was much less in the fourth quarter than it was in the third quarter and the second quarter and so forth. So I think that's coming to an end. And we're seeing, at least in the commercial Real Estate arena now that, we're not seeing as much refi activity as we are seeing people purchasing buildings, people purchasing things. So from that perspective, I think we'll see less of that kind of activity in that bucket. And then, I think we'll also continue to enjoy the seasonal uptick in the ag as we enter into 2014. And as we continue to expand that portfolio, that will continue to be a positive for us, but that will continue to have a seasonal impact. And with the West Coast transaction, working with contractors became a much more significant portion of our book, and so that's going to have that seasonal impact. But when you actually look at those businesses, while they contract in the fourth quarter, the trend line for both of those books of business continues to go up. So I would expect that to continue as well.

Operator

And your next question comes from the line of Jeff Rulis.

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

Question about, I guess, you've -- at the very end of the call, you highlighted sort of the strategic, I guess, goals for the year, one of those being kind of on the search for M&A, and you also alluded to -- you finally got a breather on conversions and everything, but in terms of M&A discussions, I guess, how has that evolved now that West Coast is largely integrated? Kind of, what are you -- I guess, are you seeing a pickup in those or inbound calls or just any thought on what you're seeing on the M&A environment?

Melanie J. Dressel

Well, I think that the M&A environment has definitely picked up over the last couple of years. And as I've mentioned before, we never had a sign on the door saying we're out to lunch, not willing to consider talking with people while we get the West Coast integration to the point that we have. We've been open to conversation throughout this. And it's because it really does take quite a while to get a deal from start to finish anymore. But I would say that with each successive quarter and the increase in the implementation of Dodd-Frank, that the conversations are definitely increasing. It's a major hurdle for many banks to get over. And I think that it's becoming a little bit more solidified that having a broader base over which to spread compliance and technology expenses is going to be worthwhile.

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

Would you be comfortable saying an asset range of -- what would be the max that you could acquire? Or I guess, put in a different way, kind of the capital levels that could support additional acquisitions? Is that appropriate?

Melanie J. Dressel

No. It's been a while since we actually calculated what the maximum amount would be to keep our capital levels where we would want them. But...

Clint E. Stein

It depends on the merger consideration, the mix of it as well. How many stocks, the throw-in to the deal.

Melanie J. Dressel

Yes, absolutely.

Clint E. Stein

So I don't know that we necessarily feel like we're constrained from a capital standpoint for anything that would be of interest to us. It's really a matter of are we more on just what's the bottom threshold that we would look at. And I don't know that we necessarily have a hard and fast size minimum. And then maximum, I guess, take Wells Fargo off the table.

Melanie J. Dressel

Well, we're still going to put it through the same filter. And that is that, we're interested in the Pacific Northwest, which would include Washington, Oregon and Idaho. We would want to make sure that it makes financial sense. And of course, that is as much the seller's call as our call and what they're willing to consider, as well as the consideration stock versus cash. But there's still the other factor that's really important to us, and that's the cultural fit. And by that, it's putting our balance sheets together and trying to find other companies that share our commitment to a very diversified loan portfolio funded by core deposits.

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

Okay. And one last one, quick one for Clint. Just as you walk through your sort of add-backs and subtractions from the reported EPS, you talked about the $1.2 million accounting FDIC impact, and then you talked about the add -- well, I guess subtracting the loan-loss provision, which also included the, I guess, the covered loan-loss provision. Is that -- wasn't -- shouldn't that be included in the FDIC impact? As in, you've added $0.05, but I guess -- wasn't that included in the $0.015?

Clint E. Stein

Let me look here and see. Yes, it was. Yes. Good catch.

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

Okay. So we could -- your $0.05 subtraction, we could just reduce it by the noncovered provision portion. Is that correct?

Clint E. Stein

Right, yes. So that's going to be, well, maybe a little under $0.015 -- you tax affect it [ph].

Operator

And there are no further questions from the phone line.

Melanie J. Dressel

Okay. Well, thanks, everyone. Happy New Year, and we'll talk to you at the end of the first quarter.

Operator

And this does conclude today's conference call. Thanks for your participation. You may now disconnect.

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