Jan 24, 2013
Operator
Good afternoon. My name is Wendy, and I'll be your conference operator today.
Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking Systems Fourth Quarter and Year 2012 Earnings Conference Call.
[Operator Instructions] As a reminder, this conference is being recorded. Thank you.
Operator
I'll now turn the conference over to Ms. Melanie Dressel.
Melanie Dressel
Thank you, Wendy. Good afternoon, everyone, and thank you for joining us on today's call to discuss our fourth quarter and full year 2012 results.
I hope you've all had a chance to review our earnings press release, which we issued this morning and which is also available on our website at columbiabank.com.
Melanie Dressel
With me on the call today are Clint Stein, our Chief Financial Officer; Andy McDonald, our Chief Credit Officer; and Mark Nelson, our Chief Operating Officer, will also be available for questions following our formal presentation.
Melanie Dressel
As we outlined in our press release, our fourth quarter results showed strong loan growth, continued improvement in our credit quality, reduced expenses and increased noninterest income. 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 review our credit quality information, including trends in our loan mix, allowance for loan losses and our charge-offs. And I will conclude by giving you our thoughts on the economy here in the Pacific Northwest, an update on our merger with West Coast Bank and a brief outline of our strategy as we move forward.
Melanie Dressel
We will then be happy to answer any questions you might have. And 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 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 2011.
Melanie Dressel
And with that, I will turn the call over to Clint to talk about our financial performance. Clint?
Clint Stein
Thank you, Melanie. This morning, we announced fourth quarter earnings of $13.5 million, or $0.34 per share.
This compares to $14.8 million for the same quarter of 2011, or $0.37 per share. Our reported earnings decreased moderately from the same quarter last year due to the substantial positive impact acquisition accounting entries had on the fourth quarter 2011 earnings.
Clint Stein
During the fourth quarter of 2011, we had net-of-tax earnings of $0.15, or $6 million and accretion income on the discounted loan portfolio, compared to less than $0.02, or $664,000, in the current quarter. Another significant item impacting the comparability of the fourth quarters of 2012 and 2011 is the other-than-temporary impairment charge of $3 million recognized in the fourth quarter of 2011 and recaptured during the current quarter.
The combination of these 2 items was an increase of $0.10 per share for the fourth quarter of 2011.
Clint Stein
We've provided a table in our earnings release illustrating the impact of certain accounting entries associated with our acquired loan portfolios. The net effect of acquired loan accounting resulted in reduced pre-tax income of $166,000 for the current quarter.
This is a reduction of $2.8 million when compared to additional pre-tax income from acquired loans of $2.6 million for the third quarter of 2012, and reduction of $12.7 million from the fourth quarter of 2011.
Clint Stein
I point out the dramatic reduction in the benefit of our acquired loan accounting from the prior year because it underscores the $0.04, or 15%, improvement in our core performance over the past 12 months. As I've mentioned in previous quarters, the individual components of our acquired loan accounting entries can change significantly by millions of dollars, in some cases, but the net change in the impact to earnings can be relatively inconsequential because of the offsetting nature of many of these entries.
Clint Stein
It is true that these acquired portfolios, by their nature, decline over time, resulting in lower amounts of accretion income. However, for portfolios covered by loss-sharing agreements, the amount of the indemnification asset amortization expense will also decline.
This is especially relevant for Columbia because 4 of our 5 FDIC deals are covered by loss-sharing agreements.
Clint Stein
To underscore this point, during the fourth quarter, we recorded through interest income, $10.9 million in incremental accretion income on our covered loan portfolios. But we also reduced noninterest income by $9.7 million as a result of the change in our FDIC loss-sharing asset.
When contemplating all the entries on these portfolios for the quarter, the pre-tax impact to income was a reduction of $166,000. This is a good example of our looking at accretion income in isolation will lead to inconsistent conclusions.
Clint Stein
Tables on Pages 3 and 9 of our earnings release illustrate the ripple effect acquisition accounting has to our income statement, and capture the various items which should be considered side by side with accretion income. Our current estimate is that total accretion income on the covered portfolios will be roughly $57 million in 2013 and $40 million in 2014.
Please keep in mind, these are just estimates and subject to adjustments, as expected cash flows on the covered loan portfolios change. While the spread between our reported and operating net interest margin will narrow, a substantial portion of the impact of earnings is mitigated by the decline in the amortization of the indemnification assets.
Clint Stein
Our reported net interest margin for the fourth quarter was 5.15%, down from 7.14% for the same quarter last year to 5.52% for the third quarter of 2012. The operating net interest margin, which excludes the additional accretion income, was 4.14% for the fourth quarter compared to 4.4% and 4.44%, respectively, for the third and second quarters of 2012, and down from 4.49% in the first quarter of the year.
Clint Stein
We spent considerable time optimizing the operating net interest margin during the fourth quarter with a view toward 2013 and beyond. I previously mentioned the prepayment of our Federal Home Loan Bank advances and gains realized in the securities portfolio.
In December, we scrubbed our investment portfolio, liquidating and replacing roughly $86 million, or 9%, of the portfolio. The majority of the bonds sold were fast-paying, mortgage-backed securities, which due to the prepayment speeds, had negative yields.
If all other variables remain constant, the combination of these 2 items will boost the operating net interest margin 6 basis points in the coming quarter.
Clint Stein
While both of these actions improve the NIM, deposit growth and the buildup of cash needed for the closing of the West Coast Bancorp merger continue to drag on the margin. Average deposit growth of $153 million during the fourth quarter resulted in 14 basis points of margin compression.
The $265 million in cash required to close the West Coast merger, decreases the margin 25 basis points. However, the margin impacted deposit growth and the cash portion of the merger consideration are somewhat interrelated.
I separated the impact of the deposit growth because it underscores the quandary our industry faces. We know that attracting and retaining customer relationships is critical to our long-term success and we are pleased to see the proficiency our bankers exhibit in growing relationships on both sides of the balance sheet.
Clint Stein
With our low cost of deposits, our growth is adding to incremental earnings, but these earnings come at the expense of softening the margins. While we have always maintained a disciplined approach to deposit pricing, we fine-tuned our offering rates during the fourth quarter.
Our average cost of interest-bearing deposits for the current quarter was 18 basis points, down from 20 basis points in the prior quarter. Our cost of total deposits for the quarter was just 12 basis points, down from 14 basis points in the third quarter.
Our biggest opportunity on the funding side will come from $379 million in certificates of deposits that will mature during 2013.
Clint Stein
On a linked quarter basis, average interest earning asset yields decreased 36 basis points to 5.36% during the current quarter, down from 5.72% in the third quarter. The decrease in yield is due to lower interest rates on loan originations and decreased investment yields.
We originated roughly $200 million in loans during the fourth quarter and in excess of $610 million for the year. The average rate on our non-covered loan portfolio was 4.94%, and it's down from 5.07% for the third quarter.
New loans were originated during the fourth quarter at rates that are about 46 basis points lower than the existing portfolio. The linked quarter decline in loan origination rates moderated from the fourth quarter, dropping 7 basis points to 4.48% as compared to a 13 basis point decline in the third quarter.
Clint Stein
The yield on the investment portfolio declined 17 basis points to 3.07% during the fourth quarter, as compared to 3.24% in the third quarter of 2012. The duration of the portfolio at December 31 was 3.63, up from 2.77 at the end of the third quarter.
PTR rates for our mortgage-backed securities have slowed from the mid-20s, and at year end, are averaging in the low 20s. Still, we expect there will be significant cash flows reinvested at lower market rates during the coming quarters, putting additional downward pressure on the yield in the investment portfolio.
Clint Stein
Total noninterest income was $6.6 million for the fourth quarter, an increase of $7.5 million from the third quarter. The increase was due in part to a reduction of $3.3 million in the change in the FDIC loss-sharing asset and the $3.7 million gain on investment securities.
Clint Stein
One of our core performance measures is to compare noninterest income before the change in the FDIC loss-sharing assets. On this basis, the fourth quarter experienced an increase of $4.2 million over the third quarter of this year.
After removing the securities gains, the linked quarter increase is $500,000, a little more than 4%. More importantly, this is up $1.3 million, or 12%, in the first quarter's run rate, driven in part by higher service charges, which increased roughly 8%.
Clint Stein
Total noninterest expense was $37.8 million for the current quarter, down from $40.9 million in the third quarter and $39.9 million in the second quarter of 2012. Our run rate for noninterest expense is another core performance measure we track, but it takes some math to arrive at a comparable number.
The current quarter includes $649,000 of merger expense, $1.4 million in net benefit from OREO and $154,000 in claw back liability recapture. After taking these items into consideration, our noninterest expense run rate for the quarter is $40 million.
On the same basis, the run rate for the third quarter of 2012 was $40.6 million.
Clint Stein
Compensation and benefit expense and occupancy are the 2 drivers of the reduced run rate. If you look at the fourth quarter of 2012, in comparison to the fourth quarter of 2011, similar improvement in the expense run rate is noted.
The run rate for the fourth quarter of 2011 was $41.6 million, $1.6 [ph] million or 3.8% higher than the current period.
Clint Stein
The continued improvement in our noninterest income and noninterest expense run rate on a linked quarter and prior year basis is the result of the ongoing efforts of our line of business leaders. Through their actions during 2012, we optimized our fee schedules while increasing our realization of accessible fees, fine-tuned our retail staffing model and developed a framework for allocating resources across our various customer delivery channels.
In conjunction with these initiatives, we reduced our FTE count by 50 during 2012, mostly through attrition, and consolidated 3 branches during the second half of 2012, which will result in additional expense efficiencies for 2013.
Clint Stein
Lastly, at December 31, our total risk-based capital ratio exceeded 20%, our leverage ratio was approximately 12.8% and our tangible common equity to tangible assets ratio was 13.3%. Prudent management of capital is a priority for us and as 2013 progresses, we will consider all reasonable means of capital utilization.
Clint Stein
Now, I will turn the call over to Andy McDonald.
Andrew McDonald
Thanks, Clint. During the quarter, our non-covered loan portfolio increased approximately $50 million or 2.1%.
Growth continued to be centered in commercial business loans and commercial and multifamily real estate term loans. Growth in business loans was centered in healthcare and social services and finance and insurance.
Andrew McDonald
Healthcare and social services growth continued to be driven by our professional banking practices group. The financial insurance segment is serviced by our commercial backers, and growth in this segment is being driven by our mortgage banking clients, who continue to originate loans at a record pace, thanks to the low interest rate environment.
Andrew McDonald
Growth in commercial real estate term loans was centered in non-owner-occupied properties, primarily warehouse properties and multifamily projects and, to a lesser extent, some retail products.
Andrew McDonald
Commercial Real Estate Construction loans also saw some modest growth with owner-occupied office and warehouse properties driving this growth during the quarter. For the year, the largest growth within the commercial real estate construction segment was in multifamily properties.
And within the commercial real estate perm portfolio, the largest growth was again in warehouse properties.
Andrew McDonald
The area that showed the most growth for the year in our commercial business loan segment were again the healthcare and social services sector, along with agriculture, forestry and fishing industries. Growth in the ag and fish markets was a positive $41 million for the year, despite a seasonal contraction in the fourth quarter of $24 million, as our ag lenders continued to have success attracting new business.
Andrew McDonald
The growth in business loans was, however, offset by a continued contraction in our residential perm and portfolios, which declined by $4 million and $3 million, respectively. The decline in these segments continues to be driven by consumers refinancing lower-cost conventional first mortgages, which helped out our mortgage banking business but has negatively impacted our balance sheet.
The covered portfolio continue to contract in the fourth quarter, declining by $53 million before discounts and loan-loss provisions, or $38 million net of these items. Problem asset resolution continued to be a big driver in this regard, but we also saw an acceleration during the quarter in portfolio turnover as many of the commercial real estate clients are refinancing their properties, and for various reasons, we don't always retain these clients.
Andrew McDonald
Year-to-date, the covered portfolio has contracted by about $220 million, with most of it being problem-loan resolutions. The balance is some seasonal line usage, along with scheduled payments and a modest amount of portfolio turnover.
Andrew McDonald
Looking at our nonperforming assets, we continue to see these decline and they now represent about 1.08% of our non-covered assets as of December 31, 2012, down from 1.2% as of last quarter and 2.02% as of the year-end 2011. Year-to-date, we've been able to reduce nonperforming assets by 43%, or $37 million.
We are proud of the job our bankers have done over the past couple of years in resolving these troubled assets and strengthening Columbia's balance sheet.
NPAs to loans and OREO and OPPO for the quarter also improved, declining from 2.1% to 1.9%. As for each of the portfolio segments, they are as follows
The one-to-four family perm percentage actually increased from 4.8% last quarter to 5 .6%. However, the amount of NPAs in the portfolio remains the same, the ratio only increased because the bucket declined.
Our commercial perm portfolio continues to decline with a 2.3% in December of 2012, down from 2.8% in December of 2011. All in all, our term commercial real estate portfolio has held up nicely over the last several quarters.
NPAs to loans and OREO and OPPO for the quarter also improved, declining from 2.1% to 1.9%. As for each of the portfolio segments, they are as follows
In the one-to-four family construction segment, while at 15.3% at year-end 2012, this is much improved over December of 2011, when it stood at 33.9%. While the ratio appears high, in fact, we only have $8 million of NPAs in this bucket.
NPAs to loans and OREO and OPPO for the quarter also improved, declining from 2.1% to 1.9%. As for each of the portfolio segments, they are as follows
Commercial construction showed the greatest improvement, declining from 19.2% this time last year to 1.4%. And today, we only have one small retail project at about $930,000 that remains a nonperforming asset, and this asset has been placed into OREO and is currently for sale.
NPAs to loans and OREO and OPPO for the quarter also improved, declining from 2.1% to 1.9%. As for each of the portfolio segments, they are as follows
The Commercial business segment showed modest improvement this quarter as well, going from 1.2%, as of last quarter to 0.9%, and was 1.9% in December of 2011. The improvement in this past quarter was primarily due to loans being placed back on accrual.
NPAs to loans and OREO and OPPO for the quarter also improved, declining from 2.1% to 1.9%. As for each of the portfolio segments, they are as follows
Our consumer portfolio continues to hold steady at about 1.2% for the portfolio, which has been pretty much the case for the entire year.
NPAs to loans and OREO and OPPO for the quarter also improved, declining from 2.1% to 1.9%. As for each of the portfolio segments, they are as follows
For the quarter, the company made a provision for originated and discounted loans of $2.4 million, down from $2.9 million last quarter, and from $4.8 million in the like quarter in 2011. The provision was primarily driven by the level of net charge-offs during the quarter of $1.6 million, and to some extent, the $50 million in originated loan growth I spoke about earlier.
For the year, the company experienced net charge-offs of $14.3 million compared to total provision for the originated and discounted allowance of $13.5 million.
NPAs to loans and OREO and OPPO for the quarter also improved, declining from 2.1% to 1.9%. As for each of the portfolio segments, they are as follows
Unless loan growth is significantly accelerated or the economy significantly improves, we expect our provision expense to closely approximate our levels of net charge-offs going forward. Past-due loans at year-end were 47 basis points, down slightly from last quarter, but essentially in the range they have been in all year.
NPAs to loans and OREO and OPPO for the quarter also improved, declining from 2.1% to 1.9%. As for each of the portfolio segments, they are as follows
In summary, it was another positive quarter with our credit metrics continuing to move in a favorable direction, albeit at a modest pace.
NPAs to loans and OREO and OPPO for the quarter also improved, declining from 2.1% to 1.9%. As for each of the portfolio segments, they are as follows
With that, I would like to turn the discussion back over to Melanie Dressel.
Melanie Dressel
Thanks, Andy. While the economic picture here in the Pacific Northwest continues to be a bit bumpy, the overall trend is toward continued positive improvement.
The larger metro areas in both Washington and Oregon are recovering faster than the states as a whole, and they are setting the pace in job growth, real estate and other leading economic indicators.
Melanie Dressel
Washington State's unemployment rate for December was at its lowest level in 4 years, falling to 7.6% from 8.5% at the end of the prior quarter back in September. The unemployment rate for the Seattle-Tacoma-Bellevue area is down to 6.8%.
While the unemployment rate continues to improve, some of the declining rate is due to shrinking labor force, as people stop looking for work.
Melanie Dressel
During the year, 2012, however, our state gained over 42,000 jobs. The construction sector, which was significantly impacted by the recession, grew faster than any other sector last month and created almost 1 of every 4 new jobs in Washington over the year.
Construction employment is still about 60,000 jobs, below where it was in December 2007. That's about a 30% drop.
Other bright spots were education and leisure and hospitality sectors.
Melanie Dressel
While Oregon's jobless rate remained steady at 8.4%, they added about 2,000 jobs in December 2012. In all, the state gained over 22,000 jobs during the year, although its unemployment rate has hovered between 8.4% and 8.9% for all of 2012, which is above the national average, which was 7.8% in December.
Melanie Dressel
The private sector accounted for all of the net employment gains, as government employers and manufacturers cut jobs. Oregon's trade, transportation and utilities sectors added 2,900 jobs, or 2,500 more than economists had expected, and retailers had a good month adding almost 2,000 jobs during December.
Some good news for both Washington and Oregon employees was the rise in average weekly wages, which was higher than the national average of 1.3%.
Melanie Dressel
The signs pointing toward a real recovery in the housing market here in the Pacific Northwest are continuing. The Northwest Multiple Listing Service recently reported that almost 65,000 sales of single-family homes and condos were closed during 2012, improving on this volume in 2011 by nearly 15%.
These sales were valued at almost $20 billion, that's nearly 20% from the previous year.
In the past year, we have seen decreasing inventory and higher prices in Washington's 5 largest cities
Bellingham, Seattle, Spokane, Tacoma and Vancouver. While Oregon housing continues to be more challenging than Washington, single-family homes and housing starts are up considerably from the recessionary lows.
The state is also seeing prices increase and fewer houses on the market.
In the past year, we have seen decreasing inventory and higher prices in Washington's 5 largest cities
The Boeing company is our region's largest private employer. Last year, they delivered over 600 commercial jets with a market value of about $46 billion, outbuilding and outselling its European rival, Airbus, for the first time in a decade.
Despite the flagship 787 Dreamliner plane's temporary grounding, Boeing continues to hire skilled workers to deal with their backlog for commercial planes. The company is predicting that they will hire hundreds of new production workers, perhaps close to 1,000, to staff assembly lines in Renton, Washington for its current best-selling 737 and one line for its newest variation, the 737 MAX.
Boeing will also add hundreds of engineering jobs for the MAX.
In the past year, we have seen decreasing inventory and higher prices in Washington's 5 largest cities
Building airplanes is important to our region, but it certainly isn't the only type of manufacturing doing well. In both Washington and Oregon, electronics, fabricated metal machines, food products and industrial equipment play a big role in the economy.
Manufacturing is a surprisingly big player in Oregon, particularly Portland, which has over 100,000 manufacturing jobs. 17th among American metro areas, nearly 20% of Oregon's state gross product comes from manufacturing, which has been a bright spot for the state, primarily due to Intel and the high-tech industry.
In the past year, we have seen decreasing inventory and higher prices in Washington's 5 largest cities
While both the Ports of Seattle and Vancouver, Washington experienced sluggish container volumes last year, down about 8% to 10%, the Port of Tacoma grew about 15% during this same time period. This was primarily due to several new container companies calling on the port last year, although existing customer volumes also showed significant improvement throughout the year.
Noncontainer, or break bulk exports, were the driver behind much of this growth. Expectations are for additional growth of 14% during 2013.
In the past year, we have seen decreasing inventory and higher prices in Washington's 5 largest cities
I always mention our military when talking about the economy of our area. The steady growth in military personnel since 9/11 helped sustained our economy during the recession and constitutes a $3 billion payroll in Washington state.
We're keeping a close eye on possible proposals to reduce ranks over the next 7 years or so, although no decisions have been made to date. Local members of Congress have been saying they expect military bases in our state to fare well as the Defense Department pares its budget.
They say forces at the base itself at Tacoma, line up what President Obama's call to shift to Pacific threats, as the war in Afghanistan winds down.
In the past year, we have seen decreasing inventory and higher prices in Washington's 5 largest cities
As I've shared with you before, most economists believe that the Pacific Northwest will outperform the country as a whole and we move forward in 2013 and beyond. Despite our ongoing challenges, we believe our diversified export-driven economy here in the Pacific Northwest is a bright spot in the country and gives us an advantage going forward.
In the past year, we have seen decreasing inventory and higher prices in Washington's 5 largest cities
I'd like to give you a quick update on the merger with West Coast Bancorp, which we announced back in September. We expect to receive shareholder approval from both companies later this quarter, with the transaction closing soon thereafter.
Our strategic plan to integrate Columbia and West Coast is well underway with cross-functional teams from both banks playing essential roles. We anticipate a smooth transition and we're eager to welcome West Coast staff and customers to Columbia.
In the past year, we have seen decreasing inventory and higher prices in Washington's 5 largest cities
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 customers and prospects. Being named as one of the strongest banks in the nation by Forbes Magazine in late 2012, as well as #1 in Washington and #2 in Oregon, has been very beneficial to the development of new relationships.
In the past year, we have seen decreasing inventory and higher prices in Washington's 5 largest cities
Equally as important will be our focus on improving the efficiency of our company. With the additional expense in new regulations and cost of compliance looming largely [ph] for our industry, it will be even more important to optimize the operational structure of our company.
Having a broader base over which to spread infrastructure investments should help with this objective. Overall, we're really feeling optimistic about 2013 and what we can accomplish despite the continuing, challenging economy.
In the past year, we have seen decreasing inventory and higher prices in Washington's 5 largest cities
In our press release, we also announced an increased cash dividend of $0.10 per common share, which will be paid on February 20, 2013, to shareholders of record, as of the close of business on February 6. This is an increase of 11% from the $0.09 regular cash dividend we paid less quarter and represents a dividend yield of 2%.
In the past year, we have seen decreasing inventory and higher prices in Washington's 5 largest cities
With that, this concludes our prepared comments this afternoon. As a reminder, Clint Stein, our Chief Financial Officer; Andy MacDonald, Chief Credit Officer; and Mark Nelson, Chief Operating Officer, are with me to answer your questions.
In the past year, we have seen decreasing inventory and higher prices in Washington's 5 largest cities
And now, Wendy, we will open the call for questions.
Operator
[Operator Instructions] Your first question comes from the line of Joe Morford.
Joe Morford
I guess, just a couple of questions on the loan growth, specifically I guess in the commercial business side. Did fiscal cliff issues and/our year-end tax considerations have much of an impact on the volumes in the quarter one way or the other?
And separately, was there any increase in line utilization rates that you saw?
Melanie Dressel
Mark?
Mark Nelson
Hi Joe. Yes, I -- I mean, clearly, there's always year-end issues every year, and I'm sure that was a motivation on some of the folks trying to get deals done during the -- at the end of the year, but I wouldn't say that was significant.
And we have a bit of overlap coming into January as well. So clearly, those items weren't as critical on year-end.
Our utilization rates are off just a little bit in the fourth quarter, I think that's a seasonal impact and I really don't see much change in that. Overall, during the year, we saw our utilization rates improving.
Melanie Dressel
Andy, is there anything you'd like to add?
Andrew McDonald
Yes. Some of the utilization rates have declined and that's primarily driven by some of the activity that's in the ag and fish portfolios, as those customers are paying down and they won't start re-borrowing until later this year.
The fisheries for crab will open up in February, we'll start to see that, and of course, the farmers will get more active. But surprisingly, we were not -- we didn't see as many people take advantage of -- or concerned about capital gains issue in terms of pulling money out of their companies, but we did see an increase in merger and acquisition activity, as people just sold their companies.
Joe Morford
Right. Okay.
And just in general, kind of broadly speaking, what are the current thoughts or expectations for organic loan growth in 2013, kind of excluding the acquisition? And is the mix still likely be more CNI [ph] and CRE?
Mark Nelson
I think, to give you just a broad generalization, Joe, I would say 2013 will be a reflection of what we've seen in 2011 and 2012, just a continuation of that. Our folks are very focused.
We've got good pipelines. And we've got good prospects out there, so I expect that we're just going to see a continuation of that trend of growth internally [ph], aside from the acquisition.
Operator
Your next questions come from the line of Brett Rabatin.
Brett Rabatin
I wanted to ask, if I heard it correctly, the loan portfolio yield declined 13 basis points and the securities portfolio declined 16, and I think that was 46 basis points lower what you're originating. I was wondering if you could talk a little bit about the pro forma margin.
And just sort of -- thinking about your current margin plus the accrual accounting, obviously, that's going to be coming through with West Coast and sort of -- if there's any update to kind of the margin on a going forward basis?
Melanie Dressel
Clint?
Clint Stein
Brett. There's a lot of things that I kind of touched on during my prepared remarks that will impact the margin.
Probably, the biggest thing that we see as, I guess, a headwind for the margin is -- just the cash that we've accumulated in anticipation of the West Coast closing. And I mentioned that's 25 basis points.
If everything else remains the same, that's the cost of -- or the impact to the margin of that. And we've had great deposit growth, and while it's somewhat connected with the buildup of the cash and the impact for the West Coast deal, at the rates we're bringing it in, a lot of it is noninterest bearing.
But even in overnight funds, it's adding to incremental earnings, but it's impacting the margin. And for the fourth quarter, that was 14 basis points.
So there's a lot of variables. Loan growth is obviously in our asset mix, on what we do with the deposit funds that come in, in closing the merger.
So I guess, with all those variables, I'm hesitant to give you a real tight projection on what the margin's going to do. I do think that we had a little bit of catch-up with what the rest of the industry experienced in the third quarter.
Our operating margin was only down 4 bps in the third quarter, and I think that some of that was building later in the third quarter and into the fourth quarter, the early part of the fourth quarter. And then we saw some of those pressures subside [ph] as we got into December.
And I'm thinking about the way our deposit growth happened in the late third quarter and early fourth quarter. I'm thinking about what happened with the investment portfolio in terms of prepayment speeds on our mortgage products and what they've done over the last month -- actually 2 months, because it's [ph] what January looks like.
So I feel a lot better about the margin in terms of going forward. But there are so many variables, I can't necessarily give you an exact number.
Brett Rabatin
Okay, that's fair enough. And then, I just wanted to maybe get a little color around -- West Coast reporting today, they continue to shrink their loan portfolio a little bit.
I was just curious about your thoughts on getting them more engaged and growing going forward. And then, maybe just any thoughts on timing of expense savings and how that looks relative to last quarter.
Melanie Dressel
Well, I guess, what I've -- would have to say is that, that will be a question that you would need to pose to West Coast since we're -- I mean, we can certainly speak to our performance. But I do not sense at all that there's a lack of engagement on their people's part.
So I guess that I would just leave it at that.
Brett Rabatin
Well, I don't mean it quite that way. I meant, perhaps, just maybe any color around their portfolio.
And just, are payoffs impacting what they're doing? Or do you have any sense of that?
Melanie Dressel
Well, all that I know is from what I read in their press release. And probably, the -- what they showed in terms of line and credit usage going down to 34%, certainly had an impact on [indiscernible], I would say.
That was the biggest factor from what I read.
Clint Stein
The second part of your question, Brett, on timing of expense savings. That's a good point that we should clarify is, when we announced the transaction, all of our modeling, we were just assuming a 12/31 close for modeling purposes.
And with our cost base, we haven't deviated from those original numbers. But I think it warrants clarifying that the cost saves we really should look at, in terms of months 1 through 12, 13 through 24, as opposed to -- and it's just correlated to fiscal year 2013 and '14, because we were assuming essentially a January 1, 8, in those projections.
So when we projected 50% cost saves in the first year, that really builds through Q2 '13 through first quarter of 2014. And then, we would expect it to build into in -- starting in the second quarter of 2014, where we have the full cost saves.
Melanie Dressel
And the integration process is really working very, very well on -- Mark Nelson from Columbia and Hadley Robbins from West Coast are chairing that integration teams, and they're just doing a great job, and the teams are working well together. So very, very encouraged at the progress that we're making.
Operator
Your next question comes from the line of Matthew Clark.
Matthew Clark
On the margin, Clint, maybe can -- and I'm not sure if you mentioned this in your prepared remarks or not, but with the drag from hording cash ahead of the team closing the West Coast deal, we assume that you would get back most, if not all, those -- the 25 basis points in subsequent quarter?
Clint Stein
Yes. Assuming that the close of the merger is essentially towards the end of the quarter, this quarter or the beginning of the next quarter, then you'd get that benefit immediately, and it would be sustained throughout the quarter.
Matthew Clark
Okay, great. And then on TAG, any impact there?
I mean, your deposit growth continues to remain fairly strong here, I'm just curious whether or not you could quantify or have any sense for whether or not to expiration of TAG had any impact on you guys? In terms of inflows, obviously?
Melanie Dressel
Yes. Well I think, to be honest, one of the things that has been very positive in terms of the public's perception of our strength has been the forward lift that I referenced in our prepared remarks on -- and the fact that even before the TAG program was put in place, we had alternatives for customers who were concerned about insured deposits.
So it has been very positive, but it kind of gets back to Clint's comments on deposits today, has kind of a reverse impact on our NIMs that will someday change, but deposits keep flowing in.
Matthew Clark
Okay. And then, just on the estimates out there, for you all, seems to be a little bit of a disconnect relative to the guidance as you originally provided when you announced the West Coast deal in terms of pro forma estimates.
Do you have a sense for whether or not they are just a model that haven't been updated to incorporate the deal? Or just curious how you view the estimates out there relative to your guidance?
Clint Stein
As I've looked at it, my assumption has been that not everybody's updated their models.
Operator
Your next question comes from the line of Jeff Rulis.
Jeff Rulis
Clint, a little follow-up, I may have missed the last portion of your -- just kind of the commentary on core noninterest expense. You talked about the $40 million level this quarter, as core knocking out of those few items.
I guess, did you say that, that can be improved upon going forward? I missed that portion.
Clint Stein
I didn't specifically state it in that regard. I guess, I was drawing the correlation to it continues to improve.
It was down just under 4% from the prior year period. It was down a little bit more from the third quarter.
But it's something that we're continuing to focus on, the initiatives that we have in place, one of the things I did mention is that as we look at allocating the resources across our customer delivery channels, how do we do that in the most efficient manner. And some of the progress we made in 2012, which resulted in a reduction of 50 FTEs, I could see those initiatives are ongoing, they're part of how we run the bank.
So I think that you will continue to see improvements.
Jeff Rulis
But the comments that you made were sort of more historical, what the trend line has been and -- up to this point, and then, some optimistic view of perhaps further improvements.
Clint Stein
Right. Yes.
I wasn't trying to -- I mean, I wanted to highlight the trend line because I think it's very indicative of the work that our management team has done. I didn't necessarily give any type of guidance in terms of how that's going to continue to trend.
Jeff Rulis
Any update to the merger cost, the $30 million that you've stated previously as you go through this and analyze it further? Is that still a number that you're comfortable stating that seems about it?
Clint Stein
It's not going to go up. I don't think that it would go up from there.
There are still a few variables that we're looking at that could bring it in a little bit under that. But I don't see it going up.
Melanie Dressel
We're still pretty comfortable that $30 million is a good goal.
Jeff Rulis
Great. And Melanie, maybe one last one.
Just on the capital plans. With the dividend announcement this -- today and in terms of -- it's safe to assume no real significant deployment through the close?
Or still kind of be on the lookout? Any update on kind of the thought process right now?
Melanie Dressel
I would say what I say all the time, and excuse me for repeating it, but we look at all different opportunities to deploy our capital effectively. But the close is getting pretty near, so I wouldn't expect any surprises.
Operator
Your next question comes from the line of Aaron Deer.
Aaron Deer
I just have 3 quick questions. One, Melanie, has a date been set for the systems integration?
And what is that [indiscernible]?
Melanie Dressel
It's not a firm date. But the conversion itself will occur, we hope, in late August.
Aaron Deer
And the -- it looks like the -- if I followed this right -- and forgive me if you've discussed this earlier, but the FHLB prepay charge, did that come through the margin? And if so, is that about 5 basis points, is that right?
Clint Stein
That came through the reported margin. We excluded it from our operating margin calculation.
And yes, on the reported margin, it's 5 basis points.
Aaron Deer
All right. Fine.
And then, Andy, the TDR balance that's not included in your NPA total, do you have that number?
Andrew McDonald
I don't have that on me. Sorry.
Operator
[Operator Instructions] And there are no further questions at this time.
Melanie Dressel
Well, great. And thanks, everyone, for joining us on the call, and we apologize for the coughing and our voices.
Whatever is going around, it seems like we all have today. So thank you, and we'll talk to you next quarter.
Operator
This concludes today's conference call. You may now disconnect.