Columbia Banking System Inc. Q2 2008 Earnings Call Transcript

| About: Columbia Banking (COLB)

Columbia Banking System Inc. (NASDAQ:COLB)

Q2 2008 Earnings Call

July 24, 2008 4:00 pm ET

Executives

Melanie Dressel - President and CEO

Gary Schminkey - CFO

Andy McDonald - CCO

Mark Nelson - COO

Analysts

Aaron Deer - Sandler O'Neill & Partners

Mathew Clark - Keefe, Bruyette & Woods

Joe Morford - RBC Capital Markets

Jeff Rulis - D. A. Davidson & Co

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System second quarter 2008 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions) As a reminder this conference is being recorded.

I would now like to turn the call over to our host, Melanie Dressel, President and Chief Executive Officer of Columbia Banking Center.

Melanie Dressel

Thank you, Mitchell. Good afternoon everyone and welcome to Colombia's second quarter conference call. Joining me on the call today are Gary Schminkey, our Chief Financial Officer; Andy McDonald, Chief Credit Officer; and Mark Nelson, Chief Operating Officer.

Before we begin, I would like 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 2007.

I'm going to assume that you have all had a chance to read our second quarter press release as well as our July 9th prerelease about the changes in our market and our intention to increase our loan loss provision. In today's call, we'll provide additional clarity and details to the information that we already had provided in these two releases and on our earlier conference calls.

Gary Schminkey will discuss with you our second quarter 2008 results including our equity position, liquidity ratio, and net interest margins. He will be followed by Andy McDonald, who will provide you with some additional color related to the allowance for loan losses, our loan mix, and credit quality. We'll then open up the discussion to your questions.

I want to reiterate that credit challenges are affecting all financial institutions; our underline banking fundamentals continue to be strong and we remain positive that we have the right strategy in place to manage through this business cycle. As we have monitored the weakness in the national economy during the past year or two, we have often said that we are not immune to the instability in the real estate markets and mortgage related industries.

We have taken proactive steps to identify the scope of the impact on our region and implement the appropriate actions. Our solid core deposits, which consist of checking, savings and money market accounts as well as CDs under $100,000, represent 80% of our total deposits and results from strong relationships that our bankers have built with our customers. We will stay the course with our focus on fundamental banking.

As we mentioned in our earnings release, the increase in our loan loss provision was due to a slowing economic environment resulting in an increase in our non-accrual loans. At this point, I want to take just a minute to discuss with you what we are currently observing in the economy in our market.

As you know, until recently our market areas here in the Pacific Northwest particularly in the Puget Sound region have been outperforming the rest of the country. In the past few months, however we have seen housing foreclosures increase as well as double-digit declines in both year-over-year housing sales and in sale prices from land and lot.

Construction and employment has been declining for the past six months or so. The statewide unemployment rates rose to 5.5% in June compared with 5.3% in May. The Seattle area unemployment rate is increasing as well although it's rising at a considerably slower rate than the rest of the country. In June, the Seattle W. average rate remained at 4% from the month earlier, which was up from 3.8% a year ago, but substantially below the state and national rates.

There continues to be a concern about consumer attitudes as well. According to the Conference Board Consumer Research Center that consumer confidence index, which had declined in May, declined even further in June. The index now stands at 50.4%, down from 58.1% in May. This is fifth lowest reading ever.

In June the state of Oregon Office of the Economic Analysis projected a slowing economy for the state in 2008, which will probably continue into the first half of next year with mild growth in the second half of 2009. The outlook for Oregon has been historically similar to that of the United States business cycle and the state is also been effected by the weakness in the housing, a sharp decline in building activity, and the high cost of energy. However, Oregon's southern market has shown a relatively milder downturn than the rest of the country and shows continued strength in foreign export.

It's also important though to note that within the Puget Sound area, there are tangible positive. Let me share with you just a few deals. First: Boeing, Microsoft and other tech companies are continuing to hire. In fact Boeing is predicting that it will deliver almost 30,000 jetliners in the next 20 years. Its global air travel increases along with the demand for more fuel-efficient planes.

Second, Washington State has immigration with people moving here for well-paying jobs. And third, Washington is one of the most export focused states in the Union and not only due to Boeing. Markel's indicated that no state exports a higher share of its output than Washington -- more than two-and-a-half times the national average. These are important factors that need to be remembered, even as we assess today's conditions.

The fact is, while there is no doubt that the economy in the nation in the Northwest continues to soften, we still see growth opportunities in all over Washington and Oregon markets. At Columbia, we are committed to building our company the right way. We are relatively less dependent than our peer banks in more volatile funding sources, such as wholesale certificates of deposits.

We have a diversified loan portfolio as well. In addition to commercial real estate lending and consumer lending, we have a healthy 34% of our loans in commercial business loans. We carefully monitor our loan portfolio, staying in frequent touch with our customers and taking a proactive approach to any credit problems that may surface.

Of course, our business is lending money, and we'll continue to make prudent loans taking into account the economic climate and collateral values. Our strong retail system now includes 53 branches in 10 counties in Washington and Oregon. We focus our business on our core deposits and maintaining strong relationships with our customers. As I mentioned earlier, we'll stay the course with our focus on fundamental banking.

And now, I would like to turn the call over to Gary.

Gary Schminkey

Thanks, Melanie. As a reminder the results for the second quarter and year-to-date reflects the financial consolidation of Mountain Bank Holding Company and Town Center Bancorp, which were both acquired on July 23, 2007. The second quarter and year-to-date 2007 financial information does not include the results of these two organizations. So, comparisons of results requires a more in-depth analysis.

Yesterday, we announced earnings for the second quarter 2008 of $1.9 million or $0.11 per diluted share compared to net income of $8.5 million or $0.53 per diluted share for the second quarter of 2007. Columbia has faced the same economic pressures and challenges, as the rest of the banking industry. Our challenges remain centered on working through our credit quality issues, preserving our net interest margins and maintaining our well capitalized designation and our strong liquidity position.

We have talked about the banks fundamentals in our release. Let's review a few of these important points. Columbia's estimated total risk-based capital stands at 11.43%, up from 10.9% at year end 2007 and 11.07% at March 31, 2008. Our capital ratios are in excess of the regulatory definition of well-capitalized of 10%. Should the need for additional capital arise, we'll certainly do everything we can to maintain the interest of existing shareholders.

As Melanie mentioned, the Board declared a $0.17 dividend for the second quarter. We are very pleased to be able to maintain our dividend for the second quarter and to modestly improve our well capitalized position. Given our current market valuation, the Board will review future dividends in light of our higher dividend yields and our payout ratio.

Our liquidity ratio is a measure to track the funds available to meet the loan and deposit needs of our customers and for the general operations of the company. Our excess liquidity is about 28% or $890 million. This liquidity comes from the bank's investment portfolio, our borrowing line at the FHLB via Seattle, the Federal Reserve Bank, repurchase agreements and wholesale funding sources.

You may have noticed that we included a section in the press release for core earnings. We removed the gains on sales of Visa and MasterCard common stock and proceeds from life insurance received in the second quarter. Removing these items produce an operating or core earnings number for the quarter of $854,000 for $0.05 per diluted share as compared to $8.5 million or $0.53 per diluted share last year at this time.

The tax equivalent net interest margin for the second quarter was 4.39% as compared to 4.36% one year ago. Despite the 300 basis points decline in short-term rates since September of 2007, including 200 basis points in the first quarter of 2008, the core net interest margin was up10 basis points from 4.29% in the fourth quarter of 2007 and up 1 basis point from the first quarter 2008.

As you may recall, over 40% of our loans are tied to the prime rate or other short-term indices. The reduction in interest income was more than offset by re-pricing our less rate sensitive core deposits as well as taking advantage of funding opportunities as we saw disruption in the market.

Average asset yields have decreased to 6.31% or 92 basis points quarter-over-quarter. Average interest-bearing liability costs have decreased to 2.43% or 119 basis points quarter-over-quarter. We expect the pressure on our earnings to continue as we manage our loan growth and competition for low cost deposits continues.

Interest income reversals for the second quarter were $335,000 net of recovery. This negatively impacted the net interest margin by 4 basis points, producing a core net interest margin of 4.43% for the second quarter 2008. Nonperforming assets ended the quarter at 2.28% of total assets as compared to 0.46% at yearend 2007.

The provision for loan losses was $15.4 million for the second quarter of 2008 versus $329,000 for the same period in 2007. Looking ahead, we anticipate the provision for loan losses to be at elevated levels in relation to prior period.

Our loans ended the quarter at $2.3 billion, down slightly from yearend 2007. Our commercial business loans totals are unchanged from December. Commercial real estate loan totals are down $23 million due to loan payoff, while consumer lending is up $19 million. Our commercial construction loans have declined by $8.5 million and residential construction have increased $12.7 million as we fund our commitments when compared to yearend 2007. We continue to report a well diversified loan portfolio.

Return on average equity for the second quarter of this year was 2.2% compared to 13% for the second quarter 2007. Removing the effect of our acquisitions, tangible return on equity was 3.6% for the second quarter 2008, as compared to 15% for the same period in 2007.

Our efficiency ratio was 59.3% for the second quarter of 2008, compared to 60% during the same period last year. We are encouraged to report an efficiency ratio below 60%, especially since interest rates have declined so dramatically since September of 2007. We will continue to work toward achieving a ratio in the mid 50s, but we expect additional expenses going forward as we maintain expected real estate owned and work our way through problem credits.

Non-interest expense grew by $3.1 million for the second quarter of 2008 over the same period last year. Compensation cost accounted for roughly 1.5 million of that total. While it is difficult to compare period-to-period due to the 2007 acquisitions, as a percentage of gross revenue, core non-interest expense was 43.3% of gross revenue as compared to 41.8% for the first six months of 2008 and 2007 respectively. This increase is mainly a function of the decline in interest rates over the last nine months, the additions of two branches in the first quarter of 2007 and the addition of a professional banking team during the second half of 2007.

We continue to closely monitor and control expenses, and we'll undertake many initiatives in 2008 to reduce overall expense growth, while maintaining our commitment to customer service and our overall strategic plan. Some of these initiatives involve working to improve our internal partnerships, market penetration and cross selling capability of our retail banking and commercial banking groups. Another example is to improve our technological capabilities to deliver our services utilizing new and more efficient practices.

Our Federal income tax was $1.1 million benefit in the second quarter, as compared to a rate of 27.8% for the second quarter of last year. The tax rate is influenced by tax credit, municipal security earnings and various CRA programs. As we move to a more normal earnings pattern, we expect the tax rate to be between 27% to 28% pretax income.

At this point, I would like to turn the call over to Andy McDonald, our Chief Credit Officer. Andy?

Andy McDonald

Thanks Gary. To reiterate some of the things that Melanie mentioned. While it is certainly true that all financial institutions in the Pacific Northwest are facing some of the same challenges that we are, it's equally true that Columbia's lower level of construction lending versus some of our peers puts us in a relatively better position than most.

As Melanie mentioned, our increased provision for the quarter is a prudent step by management. This action will increase our total allowance for loan losses to about 1.83% of net loans at the end of the quarter. Net charge-offs for the quarter were approximately $1.6 million compared with $761,000 for the first quarter of 2008. We also reported that nonaccruals totaled about $72 million as of the end of June compared with nonaccruals of $14.4 million at the end of March 2008.

Today our challenges have been centered in our for-sale housing portfolio, which has been impacted by the 30% decline in housing sales across most of our footprints. We have also seen margins decline in the sale prices, which were down 6% year-over-year. Some of the data though is encouraging and in June, we saw inventory levels dropped to around seven months in King County, Washington; eight months in Pierce County, Washington; and nine and a half months in the metropolitan area.

The weakest segment though continues to be lots and land, where we have seen values decline between 10% to 30% due to a lack of available financing. As a result of this weakness, we have placed over $29 million of performing for-sale housing loans on nonaccruals.

Furthermore, after evaluating the collateral to secure these loans, we allocated $7 billion as Pacific reserves, which we feel is prudent to certify it this time. We have been diligent in our efforts to reduce our exposure in the for-sale housing segment and in this regard, we have made progress. As you can see in the numbers, our exposure to the for-sale housing segment is essentially unchanged from the prior quarters at around $282 million in loans. However, our unfunded exposure has declined a little over $42 million since December 31, 2008 and now stands around $32 million as of June 30, 2008.

I would also like to mention that since quarter-end, we have had another $4 million in vertical construction loan payoffs, and we are able to reduce our AMD clearance by another $5, million most of which was centered in one credit, which I'll talk a bit about later. I can also tell you that we had another $21 million of our commercial construction book convert to performing terms loans this month, with the acceptable loan-to-values and debt service coverage ratios further reducing our overall exposure to construction related loans.

As I discussed in our conference call, a few weeks ago the distribution of our for-sale housing portfolio is as follows;. Approximately 34% is located in Pierce County Washington, and 30% is located in King County, Washington. In total, we have about 80% of our for-sale housing portfolio in Washington State. The Pierce County market can be further segregated into acquisition and development loans, which makes up about 40% of our exposure during that county, while vertical construction loans account for about 28%, lot loans at 20% and land at 7%. Most of the loans, we have placed on nonaccruals related to the for-sale housing portfolio in Pierce County. In total, we replaced 30% of this market on nonaccruals.

King County can be divided into construction at 60%, lots at 17% acquisition and development is also around 17% and land at 6%. King County continues to perform better than Pierce County. However we replaced about 8% of our King County for-sale housing loans on nonaccruals. The remaining 20% of our for-sale housing portfolio are in primarily in the three county area of Clackamas, Washington and Multnomah, which collectively make up 15% of this portfolio.

The three county area can be broken down as follows, acquisition development loans at 38%, vertical construction loans at 43%, lot loans at 12% and land at 6%. We replaced approximately 28% of this portfolio on non-accrual, as of June 30th. Concerning the past dues for the quarter, as you will see in our call report detail, we had approximately $21 million in past due loans, as of the June 30, 2008 up from $15 million as of March 31, 2008.

Approximately $8 million was centered in one credit and acquisition and development deal. I'm pleased to tell you that as of today, the loans that we incurred and the borrower paid down the loan to a conforming advance rate after our reappraisal indicated a decline in value since origination. The borrower also recharged the interest-free reserve for the life of the loan. In total, the commitment was reduced by $3.5 million and the loan was paid down by $2.7 million during the first week of July. Obviously, this is one of our strongest borrowers and the delay was a result of issues surrounding re-documenting the loan.

Some of the steps that we have taken to address the weakness we have seen in our for-sale housing portfolio include increased staffing levels in our special credit department, the engagement of outside advisors to assist us in determining the best course of action for each individual project and borrower, as well as constantly reassessing our collateral division. Again, we believe we have assembled a strong team of in-house professionals and outside advisors to help us work through these issues.

We continue to review our for-sale housing portfolio on a monthly basis and we are constantly monitoring the market for updated information not only, as it pertains to the projects we have financed but also the projects which our borrowers are involved in and how it may impact their overall performance. We know, we must remain diligent in our effort in managing the for-sale housing portfolio and we are not shy about devoting the necessary resources needed to deal with the challenges ahead.

We believe that these risk management strategies and actions are prudent steps for Columbia. We'll continue to focus intently on any and all potential credit issues within our portfolio. I would like to remind everyone that total construction lending comprises less than 20% of our entire portfolio.

More specifically the for-sale housing component comprises about 13%. The balance of our loan portfolio, which makes us 80% of what we do, is exhibiting acceptable levels of nonaccruals and past due loans, as of the June 30, 2008. Nevertheless, we are continually monitoring closely the entire loan portfolio for any signs of weakness caused by a slowing economy and declining consumer confidence.

Melanie Dressel

Thanks Andy. To sum up our comments this afternoon, we believe in the underlying strength of Columbia and have confidence in the actions we have taken dried out the current economic cycle. We have the right people and right risk management practices and monitoring systems in place and continue to take proactive steps to address our challenges.

We have a diversified loan portfolio and a strong core deposit base. As a result of the customer relationships, Columbia Bank can (inaudible) itself over the past. As Gary mentioned, we are well capitalized and had multiple sources of liquidity. Our strategy as always is to make things efficient that will benefit our shareholders, our customers and our employees for the long-term.

And I would like to take this opportunity to congratulate our superb team of bankers, who are the foundation of our success and give me great confidence in our future. We are very proud of what we have achieved in our 15 year history. This concludes our prepared comments, before we open the call for your questions, I'll remind you that Gary Schminkey, Chief Financial Officer, Andy McDonald, Chief Credit Officer and Mark Nelson, Chief Operating Officer, are with me to answer your questions.

And now, Mitchell, if you will open up the call for questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Aaron Deer.

Melanie Dressel

Hi, Aaron.

Aaron Deer - Sandler O'Neill & Partners

Hi, Melanie. Hi, Gary. Hi, Andy. I guess if you could --- I missed some of your prepared comments, maybe you have commented on this. But, can you talk a little bit about what's behind the balance sheet shrinkage, versus the loan side, the deposit side, and if you kind of intentionally reducing originations, given the environment?

Melanie Dressel

I'll ask Mark Nelson, our Chief Operating Officer, to answer that one, Aaron.

Mark Nelson

Hi, Aaron. Well, yes, it is intentional. When we are starting to talk on the asset side, we are focusing, clearly, on making sure our pricing is right on anything new that we do. We are focusing heavily on relationship based commercial real estate, not speculative construction type projects. We are seeing a lot of irrational pricing in the marketplace today, and we have just decided to take that kind of business out of our pipeline and be much more conservative.

On the deposit side, as we have mentioned in previous conferences, our deposits tend to be very seasonal, and on first quarter we see a run out of business deposits, primarily early in the quarter, with year end payments. We tend to see the same thing again in April, and early May tax payments drive that largely.

We had a pretty good number at the end of March. We are only $7 million off of that, all in core deposits at end. Actually, after the big run out in April, we saw really good buildup back by the end of June. And so, we feel that's very consistent with our seasonal patterns that we have seen in previous years.

Aaron Deer - Sandler O'Neill & Partners

That's helpful. And then, I was surprised to see the resilience of the margin, I guess for couple reasons. One is, just given some of the modest sensitivity you have, and given where rates have gone, but also because I expected to see greater interest reversals than the $335,000 that you mentioned. At what point do you trigger an interest reversal, because I would have thought that with the nonaccruals that you had, that number would have been higher?

Melanie Dressel

Go ahead, Andy.

Andy McDonald

The interest reversal is actually a little bit higher than that. But we had one credit that actually came back in as a recurring loan. So, we talked about the interest reversals being netted. So, the total interest reversal was $578,000 for the quarter. But we brought back in a nonrecurring loan, which added back $243,000 to earnings. But typically, what we do is, we'll reverse interests going back to the last payment that was made.

Melanie Dressel

And, Aaron, that half of what we put into nonaccruals were performing loans. So, we would not add interest reversals on those.

Aaron Deer - Sandler O'Neill & Partners

Right. I understand. Okay, that's great. Thank you.

Melanie Dressel

Thank you.

Operator

Your next question comes from line of Mathew Clark.

Mathew Clark - Keefe, Bruyette & Woods

Melanie Dressel

Hi, Matt.

Mathew Clark - Keefe, Bruyette & Woods

Hey, guys. Andy, would you mind just maybe given us, on a dollar basis, the breakdown of the construction book including the commercial constructions bucket? I have a lot of the percentages. I just want to make sure I capture everything. So, if we kind of think about the four categories at for-sale and then the other four in commercial?

Andy McDonald

Well, the for-sale category is broken out, that's about $282 million.

Mathew Clark - Keefe, Bruyette & Woods

Right.

Andy McDonald

And then, income property loans are roughly $74 million. Then you got condos that are roughly $32, and then we have owner occupied construction, which is around say $51. So, those are kind of the rough numbers, just breakup at to those four categories.

Mathew Clark - Keefe, Bruyette & Woods

Okay, it sounds good. I might follow-up with you on that. Okay. In terms of can you give us some sense of, or give us some visibility, as to what might be behind? We heard your delinquency number, but can you give us some, do you want to try to size up maybe what your watch list is, or even your surface substandard?

Andy McDonald

Well, we generally don't give that guidance, because there is much art as there is, I guess, science to that number. And I always kind of say that my substandard asset is somebody else's path, and that certainly is the case when they pay me off. So, I'm not really sure it's a good number for comparison across [spend].

Mathew Clark - Keefe, Bruyette & Woods

Okay. And can you give us, I'm assuming, when you update reappraisal hearing, you're probably discounting them in many cases. And can you give us a sense for your appetite to hold these problem assets, and whether or not you're considering, maybe, a liquidation value in some cases or not, or you think that you can get rid of this stuff more orderly?

Andy McDonald

Well, I think that we look at each project specifically, and certainly as we work through these issues with our borrowers, there will be certain cases where disposing the asset in a more timely fashion will make better sense for us. But certainly, given where the market is, there may be other assets that will take us a longer period of time to workout.

And that's one of the reasons that we've engaged some advisors it's really help us to make some of those decisions by providing us with deeper analysis from a strong real estate developer perspective, as opposed to the bankers perspective. So, that we are making sure that, if we do decide to take a longer term approach, that we have really selected the right assets to do that with. But we are still in the midst of going through all of that analysis, and so I don't really have anything more than that for you right now.

Mathew Clark - Keefe, Bruyette & Woods

Okay. And, Gary, the impact from the gain on the sale loans for this quarter on a base point impact, what was that? And then I guess, just remind us what your expectations are for the third and fourth?

Gary Schminkey

I'm remembering off the top of my head, Matt, I can get that number for the floors. But, I believe we are at $1.7 in the first quarter, and I think it went up to $2.6 in the second, but I'll have to confirm that.

Mathew Clark - Keefe, Bruyette & Woods

Okay. I think I have those numbers anyway. That's right. Thank you.

Melanie Dressel

Thanks, Matt.

Operator

Your next question comes from the line of Joe Morford.

Melanie Dressel

Hi, Joe.

Joe Morford - RBC Capital Markets

Thanks, good afternoon, everyone. I guess the first question is just a follow-up on the credit. You gave the total delinquency number, I think, was $21 million or so past dues. Can you break that out between the 30 to 89 day bucket and the 90 day bucket?

Andy McDonald

All of our past dew loans are 30 to 90, anything over 90 we put on nonaccruals.

Joe Morford - RBC Capital Markets

Okay. And, I guess the other question is just on expenses. The comp line was down maybe $1 sequentially from the first quarter. Was that just seasonal stuff or was there any bonus reversals or anything like that? And just in general, what should we expect in terms of cost control going forward?

Andy McDonald

Joe on the comp line, we did have some true-ups in the second quarter. At the end of each quarter, we true-up our medical costs, and we did that in the second quarter as well. So, that was about almost $500,000. And then I think, we also we trued up our incentive accruals for the year, based on the current environment.

Melanie Dressel

And we also had few branch consolidations during the quarter, as well as improved the comp lines.

Joe Morford - RBC Capital Markets

Okay. All right. Any thoughts this time, in general on the expense management going forward given the environment?

Andy McDonald

Well, we have mentioned that we anticipate having increased expenses, just to manage to our problem credits, as we talked about. But, we do have some many expense initiatives in place that we continued to work on. We have been working on several over the last several months, and we continually add others as we move along. But, yeah, that's always been a factor for us.

Melanie Dressel

We, it's been a little bit -- mask our efforts because of the two acquisitions that we did last year. But we have several initiatives that we’re well down the road on. They are long term in perspective. So, we are still a growth organization. We have a lot of things that we want to accomplish, and that does require making investments from time-to-time.

Joe Morford - RBC Capital Markets

Okay, thanks so much, Melanie.

Melanie Dressel

Thanks, Joe.

Operator

Your next question comes from the line of Jeff Rulis.

Melanie Dressel

Hi, Jeff.

Jeff Rulis - D. A. Davidson & Co

Hi, good afternoon. Andy, could you repeat the NPA reductions that came after the quarter end that you stated?

Andy McDonald

I didn't give NPA reductions, I gave construction loans reductions.

Jeff Rulis - D. A. Davidson & Co

Okay, okay. And just to make sure I say the same thing twice, I got to find my point in the script, when I cover that. It was in total about $13 million or so?

Andy McDonald

Well, we had a little over $20 million in income property loans covert to term loans. They were scheduled to do. And we had about $4 million of vertical construction loan payoffs, and then we have the $3.5 million reductions in AMD or commitments, and that was about $2.5 million, I believe, pay down in dollar totals, but I can't find that for the [fiscal '08] but that's pretty close.

Jeff Rulis - D. A. Davidson & Co

Okay.

Andy McDonald

And that adds up to -- about your numbers.

Jeff Rulis - D. A. Davidson & Co

All right, great. And then the capital level you stated, Gary, was that the holding company or bank?

Gary Schminkey

That's the consolidated capital.

Jeff Rulis - D. A. Davidson & Co

Okay. Do you give a bank level number?

Gary Schminkey

Not yet. We're continuing. So, I do have that, but I don't have it in front of me, unfortunately, but it's typically roughly the same. We have some funds available at the parent that we can downstream to the bank should that be needed.

Jeff Rulis - D. A. Davidson & Co

Okay. And then, I was also little surprised about the margins that held up. Is there any sort of lag effect of interest reversals, or is that immediate, and it would all be in Q2? And, in other words, would you expect any sort of margin impact in Q3 on stuff that one in Q2?

Gary Schminkey

Well, the nonaccruals that are not performing, of course, would be for the full quarter. Of course, that doesn't account for the loans that are performing. And I guess, the answer’s in an earlier question from Matt, if you don't mind. I just have the number that was included in Q2 for the floors and that was about $468,000. We have $1.7 million that will be amortized to income from the floors for '08. $2.6 million that will be amortized in '09 into the margins.

But other than that, the margin is essentially a function of how well – basically, our pricing committee has done a terrific job in re-pricing our core deposits and taking advantage of our strong deposit base. And also we've done some things from the treasury side to lock in some rates back in the first quarter.

Jeff Rulis - D. A. Davidson & Co

And then lastly, have you added a safety and soundness exam recently, or have you scheduled one?

Melanie Dressel

We don't have one scheduled. We anticipate that there will be one in the fall.

Jeff Rulis - D. A. Davidson & Co

Thank you.

Operator

Your next question comes from the line of Matthew Clark.

Matthew Clark - Keefe, Bruyette & Woods

Hi, guys. Again, just a point of clarification, Andy. The $7 million of specific reserves that you've set aside, is that for the total for-sale portfolio, or is that for the total for all the nonaccruals?

Andy McDonald

The specific reserves are as detailed in our -- was more detailed in the prior conference call. But the majority of it is for the for-sale housing portfolio. And then, we have about $1.5 million that we have set aside for our condos closing.

Matthew Clark - Keefe, Bruyette & Woods

And not set aside for the $29 million that's still performing?

Andy McDonald

No. Some of those reserves have been set aside for loans that are still performing.

Matthew Clark - Keefe, Bruyette & Woods

Okay, so could include that. And then, can you give us a sense for why that $29 million is still performing? Is it just because they aren't interest reserves, is that all really?

Andy McDonald

Yeah about a third are on interest reserves, and the rest are still being paid current, but we don't believe that will continue to be the case.

Matthew Clark - Keefe, Bruyette & Woods

Okay, thank you.

Andy McDonald

You are welcome.

Operator

(Operator Instructions) I think there are no further questions.

Melanie Dressel

Okay. Well, thank you all very much for joining us. We will talk to you next quarter.

Operator

This concludes today's conference call. You may now disconnect. Thank you, Mitchell.

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