Brian Vance - President and CEO Don Hinson - EVP and CFO Jeff Deuel - President and COO Bryan McDonald - EVP and CLO.

Jeff Rulis - D. A. Davidson Jacquelynne Bohlen - KBW Matthew Clark - Piper Jaffray Tim O'Brien - Sandler O'Neill & Partners Tim Coffey - FIG Partners.

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2018 Earnings Call. All participants are in a listen-only mode. Later we’ll conduct the 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 conference over to our host, CEO, Brian Vance. Please go ahead..

Thank you, Janice. Appreciate it. So welcome to all of you that have called in and, of course, to those also who may listen in later to our recorded version. Attending with me this morning is Don Hinson, our CFO; Jeff Deuel, President and Chief Operating Officer; and Bryan McDonald, Chief Lending Officer.

Our earnings press release went out this morning in a premarket release. And hopefully, you all had an opportunity to review that release prior to this call. And as always, I would refer you to the forward-looking statements in that press release as we go through our prepared comments and also as we answer any questions that you too may have.

Just very briefly, highlights of our first quarter 2018 where diluted earnings per common share were $0.27 for Q1 2017 compared to $0.31 for -- that should be Q1 2018, I'm sorry, compared to $0.31 for Q '17 and $0.30 for linked-quarter Q4 '17.

In January, we completed our previously announced acquisition of Puget Sound Bancorp located in Bellevue, Washington. And in March, we announced a proposed merger with Premier Commercial Bancorp, a $400 million banking company with six branches in the greater Portland, Oregon area.

Don Hinson will now take a few minutes and cover some of the financial statement results for the quarter.

Don?.

Thanks, Brian. I'll start with the balance sheet. We had total asset growth of $563 million in Q1. We acquired assets for the fair value of $639 million during Q1 in the Puget Sound merger, including goodwill of $68.5 million.

We liquidated the $80 million of investment securities acquired from the merger to reduce FHLB borrowings by $52 million in Q1 as well as funding loan growth. Net of the $388 million in loans obtained in the Puget Sound merger, loans increased $43.2 million or 6.2% on the annualized basis.

This is an improvement from the 3.5% annualized increase in loans in Q1 2017.

Due to the higher concentration of commercial loans of Puget Sound Bank, percentage of C&I loans of total loans increased to 27.4% at March 31st from 22.7% at prior year-end, and total commercial loans increased to 80.7% of total loans at March 31 from 79.1% at the prior year-end.

Net of the $560 million of deposits [indiscernible] in the Puget Sound merger, deposit grew $5.8 million in Q1. This is slightly below the deposit growth of $13.8 million in Q1 2017. This is partially due to $9 million of brokerage CDs that matured but were not renewed in Q1 2018 which muted total deposit growth. Moving on to credit quality.

Nonperforming loans increased to $15.7 million at March 31st from $10.7 million at December 31st. The percentage of nonperforming loans to total loans increased to 0.48% at March 31st from 0.38% at the end of 2017. The increase in nonperforming loans was due primarily to three credits.

A $3.1 million ag credit that is well secured and two commercial credit relationships, totaling approximately $1.9 million. Of which, approximately 50% of the balance is SBA guarantee. The ratio of our allowance for loan losses to nonperforming loans still stands at a very healthy 211%.

In addition, included in the carrying value of the loans, a 12.7 million of purchase accounting net discounts, which may reduce the needs of an allowance for loan losses on those related purchased loans. We have net recoveries of 23,000 in Q1 compared to net charge-offs of 652,000 in Q4 2017 and 356,000 in Q1 2017.

Potential farm loans increased 9.7 million during Q1. Of this amount, 6.1 million was due to loans acquired in the Puget Sound merger. Our net interest margin for Q1 was 4.12%, this is a 10 basis point increase from 4.02% in Q1 2017 and a 23 basis point increase from Q1 2017.

Pre-accretion net interest margin was 3.96% for Q1, an increase from 3.74% in Q4 2017 and 3.75% in Q1 2017. Pre-accretion loan yields increased 15 basis points to 4.7% in Q1 from 4.55% in Q4 '17 and 4.52% in Q1 '17. New loans for Q1 originated a weighted average rate of 5.00%, an increase from 4.58% in Q4 2017 and 4.40% in Q1 2017.

The increase in rates on originated loans is a result of the continuing shifting upward of the yield curve. The cost of funds for Q1 was 0.35%, which is a decrease from 0.37% in Q4 2017 and an increase from 0.28% in Q1 2017. This decrease from Q4 was due also to a decrease in the use of FHLB advances of the funding source.

Our cost of total deposits for Q1 remain relatively stable at 0.21% compared to 0.20% in Q4 2017 or 0.16% in Q1 2017.

Noninterest income in Q1 decreased 1.5 million from Q4 2017 due to the 680,000 net gains on sale of four branch buildings that occurred in Q4 in addition to decreases of 260,000 loan sale gains and 251,000 in interest rate swap fees from the prior quarter. Moving on to noninterest expense.

Year-over-year, noninterest expense for Q1 2018 increased 9.5 million from Q1 2017, due substantially to an increase in acquisition costs over prior year quarter as well as the ongoing expenses related to Puget Sound Bancorp, also change of control. Noninterest expense to average assets was 3.7% in Q1 2018 compared to 2.85% in Q1 2017.

Included in Q1 2018 in noninterest expense was 4.7 million of merger-related expenses as well as an increase of 471,000 in core deposit tangible amortization from Q1 2017. Removing merger-related expenses and core deposit tangible amortization, noninterest expense to average assets improved to 2.78% in Q1 2018 from 2.81% in Q1 2017.

In addition to the impact on the expense metric, merger-related expenses impacted earnings per share by $0.12 in Q1. Income tax expense decreased to 1.4 million in Q1 from 7.3 million in Q4 2017 and 3.1 million in Q1 2017.

The decrease from Q4 was due to a combination of the reduction in the corporate tax rate from 35% in Q4 to 21% in Q1 2018, the revaluation of net deferred tax assets in the amount of $2.6 million in Q4 2017 and lower pretax income in Q1 2018. Year-over-year, the effective tax rate decreased to 13.3% in Q1 2018 from 24.9% in Q1 2017.

Bryan McDonald will now have an update on loan production..

Thanks, Don. I'm going to provide detail on our first quarter lending results by production area starting with our commercial lending group. In the first quarter, commercial teams closed $148.7 million at new loans, which is down from $162.1 million closed in the fourth quarter of 2017 and up from $121 million closed in the first quarter of 2017.

Commercial team pipelines ended the first quarter at $345 million, which is up from $342.5 million at the end of the fourth quarter of 2017 and down from $362.6 million in the first quarter of 2017. Moving to interest rates.

The average first quarter interest rate for new commercial loans was 4.93% in the first quarter compared to 4.57% in the fourth quarter of 2017. And as Don mentioned, the average first quarter rate for total loans was 5%. SBA 7(a) production in the first quarter totaled 10 loans for $5.69 million and the pipeline ended the quarter at $22.5 million.

This compares to the fourth quarter of 2017 when we closed 7 loans for $2.39 million and the pipeline ended the quarter at $11.1 million. Consumer production during the first quarter was $49.5 million, down slightly from $51 million in the fourth quarter of 2017 but up from $35.5 million in the first quarter of 2017.

The mortgage department closed $32.4 million in new loans during the first quarter of 2018 compared to $35.9 million of new loans in the fourth quarter of 2017 and $33.3 million in the first quarter of 2017.

The mortgage pipeline ended the first quarter at $36.3 million, up from $27.3 million last quarter and up from $22.6 million in the first quarter of 2017. Current pipeline is comprised of 25% refinanced loans, 26% purchased loans and 49% owner-occupied construction loans. This compares to last quarter's pipeline where refinanced business averaged 48%.

I will now turn the call back to Brian for an update on capital management as well as some closing comments..

Thanks, Bryan. Starting with capital management, our regular dividend payout ratio for Q1 was 56%, which is over our guided 35% to 40% payout ratio due to the impact of merger-related expenses in Q1. Adjusted for the $0.12 per share impact of merger-related expenses, our payout ratio was 38% for Q1.

We continue to believe our capital position sufficiently supports our balance sheet risk, our internal growth and potential future growth, both organic and M&A. Just some general observations for you. We continue to be optimistic about the overall Pacific Northwest economy.

And with population growth in the region continues, CRE construction and valuations are robust, single-family residential values continue high at some of the highest valuation growth rates in the nation and competition among banks is brisk.

While all of the above are generally positive, we are currently in an economic climate in the Pacific Northwest, but caution in certain segments is prudent. This is why we have been focused on commercial real estate concentration management for the past few years or so.

Loan growth in Q1 '18 was a bit stronger than growth in Q1 of '17, as Don has noted. And our Q1 loan growth in general, tends to be a bit slower due to cyclical growth in the Pacific Northwest during the first quarter.

While our CRE concentrations are approximately 260%, we anticipate our continued discipline of CRE concentration management will likely mute over our loan growth in 2018, and we believe that is a prudent action at this point in the cycle.

We continue to believe recent acquisitions, Puget Sound Bank closed in Q1 and Premier Community Bank, announced but not closed, will augment growth in the latter half of 2018 as conversions are completed and acquired lenders refocus on growth.

Our Puget Sound Bank conversion is scheduled for May 5, and we continue to believe Premier Community Bank will close in early Q3 with the conversion in Q4. Integration for both organizations is going well, and we are pleased with similarity of cultures of both organizations.

As mentioned in our Q4 call, our overhead expenses increased as expected due to merger-related expenses. While our overhead increased as anticipated due to merger-related expenses, we also had some increases attributed to continued growth initiatives in our Metro regions of Seattle and Portland.

We are pleased the CRE loan-to-deposit ratio hold steady, following our acquisition of Puget Sound Bank at 84%, but particularly pleased with the improvement in our deposit composition. You will note the percent of total deposit improvement in DDA and money market while at the same time, total non-maturity deposits increased to 89%.

Additionally, as Don noted, our cost to deposits relatively remain stable at 0.21% compared to 0.20% in Q4 of '17. We continue to believe quality deposit composition, cost to deposits and leverage as measured by loan to deposit levels is important to us and increasingly important to the community banking space.

We continue to focus on maintaining, hopefully, even improving our strong funding base and the quality of our deposits. Also, as Don noted, we are pleased with the improvement in our overall net interest margin.

We also believe maintaining and improving NIM is not only a function of loan pricing, but equally minimizing the likely baiting increases our industry is likely to experience going forward. I would also like to draw your attention to our tangible book value following the acquisition of Puget Sound Bank.

Our current tangible book value per share decreased by a net of only 1.1% during Q1, and our TCE remains constant at 9.6% from Q4 2017 to Q1 of '18, which, of course, includes the acquisition of Puget Sound Bank. And finally, we continue to expect M&A activity in banks less than $1 billion and remain active and interested in additional M&A.

That completes our prepared remarks, and I would welcome any questions you may have and would once again refer you to the forward-looking statements in our press release as we answer your questions.

Janice, would you open the call for any questions?.

[Operator Instructions] Our first question comes from the line of Jeff Rulis with D. A. Davidson..

I was hoping that -- maybe walk through the expense line a little bit, I guess, from the top. I guess if you backout the merger costs, you get to about $32 million. There are some puts and takes with timing of the Puget Sound deal and the conversion.

What you could talk about kind of as we progress and maybe exclude Premier Commercial for now, but just kind of the run rate there and over the next couple of quarters, what could be adjusted in that number?.

Well, Jeff -- it's Don. So I'd just say, the run rates, we've -- that's included pretty much the whole quarter of Puget Sound Bank operations. So we're -- you've got to factor that in. In addition, one thing I'd like to mention is again -- I'd mention this briefly is the core deposit tangible.

And we initially modeled this back in the summer of last year. We modeled a core deposit tangible that would turn out to be a -- what it turned out to be was twice much of we initially modeled due to a combination of interest rates and tax rates. And so the CDI amortization is higher.

So that hopefully has an impact on kind of your -- the quarter-over-quarter expenses. So I think that we're going to see, again, not many cost saves. Maybe you start seeing this a little bit, the cost saves next quarter from the Puget Sound Bank merger. But we'll also see a few more work-related expenses.

So those are going to play -- offset one another. And you're not going to see -- overall, you're not going to see much there going forward. But if we're going forward, obviously, talk or I'd say not counting Premier, you're going to see the cost saves kick in for Puget Sound Bank..

Okay. If we just sum that $32 million and merger costs, how would -- they are -- sounds like you could improve upon that post conversion..

Correct. We have post conversion. Once all the merger-related costs, that should come down..

Right. Okay..

So not counting again for the Premier bank and all those -- for both merger-related costs and ongoing costs there..

Got you. Okay. And then maybe just diving into the margin as well. Is there any carryover benefit quarter-to-quarter? I mean, it -- I don't know, the timing or the paydown on the FHLB. And you've got a -- an improved deposit mix shooting out there, I guess, a 3.96% adjusted.

What are your thoughts on the margin quarter-over-quarter into Q2?.

Well, I'm still pretty optimistic. We've -- again, we've put on new loans at 5%. That's still higher than the yield on our loans for the quarter. So that's -- give me optimism that it's going to go up. In addition, on our overall list, the short end of the LIBOR rates continue to increase in anything.

We have floating or -- is going to benefit from that in addition -- for additional prime increases. So -- and we've been able to -- again, it's -- I think a lot of the margin will both depend on how much it goes, but I'm optimistic it's going to go up. But how much it goes up, I think, will be somewhat dependent on how we can hold deposit costs down.

We'd been able to do that so far, and that will be a key to, I think, our margin going forward..

I would add. This is Brian. Jeff, I would add to that. I -- for the industry, I believe the deposit betas are going to begin to ramp up. We're seeing a lot of information to that effect. So while we've been able to hold betas down and really, our deposit costs have remained pretty flat. And it's hard to predict where that's going.

But I think we're anticipating some deposit beta creep up. We're in enviable position with our leverage position, our loan deposit position. So hopefully, we can mute that a little bit.

And I would remind everybody that for the last year or so, we've had a very conscious effort with swaps, of taking the floating side of that which has muted NIM in the past. But now we're seeing the benefits of that as -- that the short end continues up. And that was a very conscious effort on our part. And we're seeing the benefit of it today..

And Jeff, this is Don again. I think or I will say one more thing is that due to this, the first quarter is always kind of a unusual quarter due to the number of days, and we calculate our margins based off days. So part of the increase was due to that. Not a lot, but part of it. So as we get more number of days in a quarter, that impact us slightly.

But just to be aware of that, I'm talking kind of long term as we get to the next few quarters..

Next we'll go to the line of Jacquelynne Bohlen with KBW..

Don, how much of your securities are adjustable rate?.

I think it's between 20% and 25%..

And is that fairly consistent historically?.

Well, it has been over the last, I think, few quarters. We've really increased the amount of those secured -- adjustable securities in 2016 and early 2017..

And where are the -- priced at today, if you know?.

Say again?.

Where are those priced at today if you have it handy?.

The price?.

The yield on them?.

Oh, the yield on those? I don't know those specifically, what they're yielding. But I just know that there -- it's -- there are type of [indiscernible]. I can tell you one thing is that the prices -- actually, two prices on them have gone up quite a bit. And that's one of the reasons why we haven't been buying any recently.

We were able to buy somewhere that prices were lower that there've been -- the spreads on those have really tightened. So we have not been adding as much as we have been a few quarters ago..

And do you have the general location of where the merger charges, warehouse in the quarter?.

You mean....

Whether compensation, professional services, just that kind of stuff..

Yes, I do. So the -- of the $4.7 million, I would say about $2.75 million was in compensation and about $1.6 million in professional services with most of the rest of that in the data processing area. But some -- this have all been spread out to some other categories..

And then just one last one from me, and then I'll step back. In the press release, you had mentioned three loan payoffs from Puget Sound. If we could maybe just get a little bit of color on what drove that, if there were relationship exits, if it was just normal operations.

And then what kind of behavior you're seeing from Puget Sound customers, both on a loan and deposit basis following the merger close?.

Jackie, I'm not sure where -- when you say you're referring to the three loan payoffs from Puget Sound Bank..

[indiscernible] really to the discount, part of this -- -- the discount that we received..

So Jackie, I don't think there's anything unusual with those. I think they were just kind of some payoffs. Some have to be a little larger, so we brought in some of the discounts on those. That's one reason why our discount accretion was a little higher. But I think Bryan can speak to it overall, what we're seeing..

Yes. In general, it's been a very smooth transition so far. And we've seen deposit and loan growth not large, but seen deposit and loan growth out of the Puget Sound Bank teams since the merger closed in January..

And I think to that point, Jackie, and I think this is pretty typical in any merger-related activity. Your relationship managers has become internally focused in terms of just focusing on existing relationships and making sure everybody's comfortable and helping the folks understand a little bit about the merger.

I think once we get through the conversion, then they can once again become externally focused and really start working those customer base and prospect base and accessing our larger balance sheet.

And that's why in my comments, I said that we're looking for maybe both stronger growth in latter half of the year as both Puget Sound and the Premier folks are able to reengage on externally focused basis..

Okay.

And just based on the timing of the conversions with one happening in about a week or so and the other happening in the fourth quarter, is it fair to say that everybody will be up and running and ready to start off 2019 fresh, understanding that the Puget Sound folks will be there long before 1Q '19?.

Yes. I would say so. And actually, looking at the pipelines, they're strong. They're strong right now, Jackie. So we're optimistic today..

Okay. Great..

And to that, Jackie, I would add, this is Brian, another comment on the pipelines. I hope folks picked up on my comments about managing CRE concentrations, we're dead serious about that. I think that concentration risk is one of those things that I'm not sure a lot of folks are paying attention to these days, but concentration risk is real.

And I'm saying it from an industry point of view.

And I will tell you, it is muting our current loan growth because we have intentionally -- especially on the nonowner occupied piece of that, we have a number of different governors on sourcing and booking new credits there or we're just very focused on maintaining our concentration discipline management..

Brian, when you put these limits on teams and understanding that this is nothing new in a discussion we've been having for several quarters now, what's the reaction from your teams? And do they understand why these levels are being put in place?.

I'll ask Bryan to comment to this as well. When you say limits on the teams, we don't necessarily -- the way we manage this is by managing to pre-described limits within a variety of buckets within the portfolio.

And as then as we get -- as certain buckets begin to increase, then we start sending messages to the lenders to not source credits in those buckets. And we've sent recent messages to them, and Bryan might speak to their reactions..

Yes. And we try very hard obviously, to keep an eye on not only at our current concentration levels, but what's in the pipeline. And as we make our adjustments, we do our best to not impact the deals in process. So we've been very working very hard to do that.

And that I think really helps the bankers in the field adjust as certain categories tighten up then they're lowering their calling efforts. The market is strong. There's lots of construction, lots of commercial real estate activity, and our concentration challenges is much due to the market in that that's still segments are so strong.

There's lots of opportunities and a number of very high quality opportunities in that segment. But as Brian said, we're always trying to stay in balance. And so as we ran a little bit hotter in one area or another, we just do our best to work with the teams, to shift the focus. The messaging isn't new or changing from quarter-to-quarter.

It's just a question of where we sit at any point in time..

And this is not to suggest that many of these loans are bad loans that we turn away. There's some of these loans we'd love to have, but we're just very disciplined as to the self-imposed concentration risk management.

I just think from an industry point of view, this is going to be something that if banks aren't paying attention to, that could create some issues down the road.

Even if we put back in the failures, bank failures in 2010, most of those were concentration-focused failures whether it's on the asset side or its good loan side or even in the security side. And so I think this concentration risk management is important at this point in the cycle. And so we've got a good deal of discipline around that..

And our next question comes from the line of Matthew Clark, Piper Jaffray..

I wanted to first ask you about the net charge-offs coming in at zero and whether or not you could isolate a couple of large recoveries just to try to get a sense where normalized net charge-off rate might be going forward..

Yes. Don, can you get some details? I really don't think we had any large recoveries. I think we had a few just normal recoveries that came in. I think just our -- you -- our normal activity and that's for the last several quarters has been pretty clean. And that's, of course, a good thing or hard to predict going forward.

But I think just from a big picture comment, I continue to have a pretty good confidence level about the quality overall portfolio.

Don?.

Yes. I don't think that's a really unusual for us to have a quarter without any net charge-offs. I think we always have some charge-offs. And in this, we have a few recoveries that we're able to single out. I think that's necessarily an unusual as far as the rate. Obviously, we're not going to give guidance on this.

But if you look over the last year or so and look at our charge-offs, I think -- I don't see anything unusual or would change the pattern of what we've been doing over time in that area..

But Matthew, did your question get to specific recoveries in terms of size or maybe I misunderstood your question..

I was just -- yes, I was just wondering if there's any -- if there are lumpy recoveries in the quarter that can unmask the net charge-offs, that's all..

I think no. I don't think so, Don. Yes, no..

Okay. And then just shifting gears to the expensed average asset ratio. I think even if excluding the merger charges, you're on 2.85% flat year-over-year. I'm sure that's a ratio you want to improve upon.

But do you have any kind of goals in mind as you progress through the year with the commercial Premier deal as well coming into the numbers?.

Yes. I'll give you a big picture again. Don can fill in detail. I have said that we hope to -- on a run rate at the end of this year to be similar to the run rate at the end of '17. We still have a fairly high confident level around -- confidence level around that. I think that expense management continues to be a focus of the Company.

I will tell you that we do have growth initiatives as well in the metro markets of both Seattle and Portland. We continue to be very positive about those two markets. And we're adding staff to those markets. And Bryan might be able to speak to that. It's not teams, but it's lender here, there -- support person here and there.

But I think that while that's a growth initiative, it does impact expenses. And so that kind of masks maybe some of the otherwise improvement we would have in the overhead ratio. But I think that -- our hope is that we would continue to show improvement. .

I think -- and if you look -- we're always going to have a little bit higher overhead ratio. I think in Q1 -- any way if you look at the prior years, they kind of bumps up from Q4 to Q1 due to -- just expenses that occurring in Q1.

So I think we're going to see improvement on the core -- you might say -- call it core overhead ratio but -- that we call the noninterest expense over average assets.

Going forward -- and the combination of just again Q1 being higher, getting through some of these, the cost savings that we're going to get through the Puget Sound Bank merger once the conversion occurs..

Bryan, you might want to speak a little bit to Seattle, Portland..

Yes. We have been continuing to recruit. And we did out a couple of additional sales staff down in Portland right at the end of last year. And we're continuing to recruit in King County and hope to make a -- we made one addition in the first quarter, and we're hoping to make other adds. The timing is difficult to predict.

But we are continuing to recruit staff and grow those teams as they're providing really good opportunities for growth..

And Matt, this is Don. I -- just as a follow-up on this term, on the charge-off. We did have -- when it did look out, we did have one charge-off or loan recovery that was $324,000 of the C&I. So other than that, the rest of them were pretty small. We did have 1 kind of a larger one..

Okay. Great. And then on the other fee revenue line item down linked-quarter. I think you may have called something out during your prepared comments.

But do you feel like this $7.4 million of kind of fees all-in is a good run rate to build from?.

I think that we were down a little bit in Q1 on maybe some fee income side on the loan area. And Bryan, you might want to speak to that..

Yes. The swaps were down. They tend to be fairly bumpy. But looking at the pipeline, there were -- we're confident that, that will be good here in '18 as it was in '17. Again, that tends to be kind of bumpy. Our mortgage business, we're seeing much more portfolio business than secondary market. So that will impact the gains there.

As I mentioned, the current pipeline, the portfolio business is now up to almost 50%. That's our less secondary market business, but good relationship business for us. And then the 7 a pipeline is very strong. And that will be a question -- comes more down to a question of do we sell those loans? Is that the most -- is that the best financial decision.

And we just look at those loan-by-loan and make a judgment on that. But the pipeline is strong going into the second quarter on SBA..

But Don, I guess just maybe go forward and maybe a little light in Q1 so....

I think it's going to improve in future quarters..

Okay. Great. And then last one from me just on the tax rate. Any updated thoughts on kind of the second quarter? And then with Commercial Premier, I think it's going to bump up a little bit. But just your updated thoughts on the tax rate outlook..

Well, I think it's -- I think in the last call, I mentioned I think the overall -- I think the tax rate is going to be around 15%. It was lighter this quarter because our pretax income was down. Therefore, making the tax exempt income a bigger impact. But I still think 15% on a run rate is still a good number.

Things could affect that such as -- and maybe in Q3 when we close Premier, and we have -- usually, the quarter we close, we have larger expenses and that can also drop the effective tax rate again. But for next quarter, I would expect to get closer to 15% of it like -- as I predicted. So....

And next we go to Tim O'Brien with Sandler O'Neill & Partners..

So Brian, we appreciate the focus on concentration risk. Given those comments and given what you said -- have said previously about kind of a targeted growth for the full year, 68%, something like that.

Does that move the needle there, the view towards CRE concentration? Or do you make up ground underwriting in other places and growing other segments?.

Yes. I'll -- again, I'll give you a big picture and Bryan can follow us in detail. I -- my sense to the whole thing is -- I honestly believe that concentration management has been and will continue to mute growth.

That's just a reality of borrowed risk profile and then -- and what we see going on in the current market conditions here in the Puget Sound region, but [particularly] Northwest, in general.

Having said that, I do like our prospects for growth, and so while CRE management is going to mute it, on the plus side, I think what we're going to see is as the Puget Sound bankers become more externally focused and Premier bankers come online and do likewise, they were going to see that volume pick up in the latter half of the year.

So it's hard to predict just how much they will add versus the muting effect of CRE, but I continue to believe that our growth rates in '18 will be similar to what they were in '17.

Bryan, additional thoughts?.

Yes. I agree. The best indicator is really that pipeline coming out of the first quarter at $345 million compared to $342 million at the end of the year in a good position going into the second quarter. And if you look at the consumer businesses on that portfolio of production there, it's right on track with our expectations.

So we're -- we've got a lot of staff out actively calling. And we're pretty pleased with the pipeline at the end of the first quarter..

Okay. Great. And then for Don, do you have -- I know you might have mentioned this, but do you have a budgeted conversion costs number for the second quarter? Or did you update that for us on the call? I might have missed it..

I didn't update it. I'm thinking it's going to be for Q2 -- it's going to be between the two banks around $1 million, $5 million in that range. That's kind of a ballpark, but we're around there..

And that it include the -- any costs associated with the pending close of Premier as well as conversion cost?.

Yes. Correct..

Do you know how much conversion cost you're anticipating just specifically for the Puget Sound conversion?.

I think it was somewhere between $600,000 to $800,000..

And next we go to Tim Coffey with FIG Partners..

Was there any seasonality in the comp line and expenses?.

Tim, it's Don. Just a little bit. We always have a little bit more. In the first quarter, there are some -- there are going to be some true-ups as far as the bonuses or tax -- our tax impacts the bonuses, are always higher. We're paying full [indiscernible] all the FICA in Q1 where that somehow dissipates as we head further through the year.

So -- but other than that, a lot it was just -- again, like I had mentioned and some of the end numbers I've already, a lot of those were due to merger-related activities..

And then from what I have understood that -- the pulling back on CRE really hasn't impacted -- even your pipelines are really -- your kind of outlook on the pipelines.

Was that correct?.

Yes..

Have you thought about alternative ways of reducing concentration, perhaps, beefing up the mortgage loan business to portfolio of loans or even purchasing non-CRE loans?.

Tim, it's Brian. We don't buy loans. That's been a pretty long held belief and strategy. We produce what we -- our own -- internal production is what drives growth. That's flat out. I think that in terms of changing models in terms of maybe taking on a little more mortgage shifting. I think these are things that we look at all the time.

And if we see an opportunity, you heard in Bryan's comments, that there were -- have got a little bit more mortgage, single-family that we're putting here in the portfolio, there's a variety of reasons why we choose to do that.

I -- Bryan can offer some detail again, but I just don't see any of that being big swings one way or another and holding pretty closely to our long held beliefs of portfolio management, risk management, concentration management, quality management, all of those points.

Bryan?.

Yes. That's true. And we -- if you look at the consumer lines, we like stable growth in those sectors, I'd say, maybe rather than moving one up to 15% to 20%, we'd like to index into that portfolio over a long period of time.

And we are seeing more consumer mortgage construction activity, which will raise that number up, but since so much of the bank is commercial totals that won't move the needle significantly. So we continue to focus on the C&I and the owner-occupied and -- there's also the funding side of it, which is important to us.

It isn't just the concentration management, we're also looking for those 4 relationships, the significant deposits, relationships in those are tend to come more often out of the C&I and owner-occupied relationships than, say, other more transactional classes, including purchases. But we are regularly asked.

And I think, as Brian noted, continue to just maintain organic options..

Tim, this is Jeff Deuel. Also from a practical standpoint, right now we have not just growth initiatives, but two transaction going on. It's not actually the best time for us to be embarking on a new business line or growing one that's fairly stable at this point..

That's a good point. I'd consider that. And then my last question, I missed it in the comments and your prepared remarks.

But what was the runoff in brokered deposits?.

9 million. I think it was -- and not necessarily brokered....

Well, brokered CDs..

Soft CDs. Okay. Yes..

[Operator Instructions] And we have no further questions. Please continue..

Well, thank you, Janice, for hosting the call. We will see many of you that are on the call at the Davidson conference coming up and then followed by a conference that will be at the Piper Jaffray on East Coast. So we look forward to seeing many of you then. Appreciate your continued interest in the company. Thank you..

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