COLB
#Thank you, Charlotte.
Good afternoon, everyone, and thank you for joining us on today's call as we review our fourth quarter 2017 results, which we released before the market opened this morning.
The release is available on our website, columbiabank.com.
We achieved record net income of $112.8 million for full year 2017.
It was a challenging year, and we're pleased with the outcome.
During the fourth quarter, we reported net income of $15.7 million, which includes the expenses related to Pacific Continental acquisition and the deferred tax asset remeasurement charge following the passage of tax reform legislation.
<UNK> will provide more color regarding this adjustment in his comments.
On November 1, we closed our acquisition of Pacific Continental Bank and are delighted to have the talented bankers of Pacific Continental join our team.
Integrating Pacific Continental into our financial statements largely explains the significant changes in loans and deposits as of year-end.
Loans increased $1.9 billion to $8.4 billion and deposits are up $2.2 billion to $10.5 billion.
System conversion planning has been ongoing for some time and we're confident that we'll deliver a smooth transition for our new customers.
The system conversion date is set for March 12, 2018.
On the call with me today are <UNK> <UNK>, our Chief Financial Officer and Chief Operating Officer, who will provide details about our earnings performance; and Andy <UNK>, our Chief Credit Officer, who will review our loan activity and credit quality information.
I'll conclude by providing a brief update on business conditions.
Following our prepared comments, we'll be happy to answer your questions.
It's important that I remind you that we'll be making 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 filing and, in particular, our 2016 SEC Form 10-K.
At this point, I would like to turn the call over to <UNK> to talk about our financial performance.
Okay.
Thanks, <UNK>.
Loans increased $1.9 billion or 28.4% during the quarter due to the acquisition of Pacific Continental and $378 million in combined loan origination.
Offsetting this somewhat was a decline in revolving line utilization from 48.2% last quarter to 45.9% this quarter.
That equates to about an $87 million impact.
In addition, prepayment and payoff activity was $9 million higher in the fourth quarter as compared to the third quarter, which is about a $9 million impact.
New production for the fourth quarter was predominantly centered in C&I and commercial real estate and construction loans.
Term loans accounted for roughly $260 million of the total new production, while new lines represented $117 million.
The mix of new production remained granular in terms of size: 24% of new production was over $5 million, 28% was in the range of $1 million to $5 million, 48% was under $1 million.
In terms of geography, 47% of new production was generated in Washington, 36% in Oregon and 4% in Idaho.
C&I loans ended the quarter at $3.4 billion, up $642 million or 23.5% from the previous quarter and of course, that includes the Pacific Continental acquired loan.
New production was $151 million this quarter versus $115 million last quarter but was somewhat offset by higher prepayments in this portfolio.
Industry segments with the highest C&I loan growth in the quarter, including the acquired loans, were the dental book, professional services, health care and social services, construction, and of course, the ag, forest, and fish portfolio contracted about $31 million, representing the seasonal nature of that portfolio.
Commercial real estate loans ended the quarter at $3.8 billion, up $1 billion during the quarter or approximately 35.4%, again, including the acquired loans.
Property types where we saw the most growth was office, retail and manufacturing.
Commercial and multifamily construction loans ended the quarter at $372 million, up $158 million or 73.8% from the prior quarter.
And again, this includes the acquired loans.
Health care, warehouses, manufacturing and multifamily was where we saw growth.
On the credit side, the company had a provision for the allowance for loan and lease losses of $3.3 million as compared to a provision recovery of $648,000 in the prior quarter.
This included a provision of $4.1 million for the originated portfolio, $1.9 million for the Pacific Continental portfolio.
Offsetting these provisions were releases from the West Coast and Intermountain portfolios, which combined was $1.25 million, and a release of $1.5 million from the purchase credit impaired portfolio.
As of December 31, 2017, our allowance to total loans was lower at 0.91% as compared to 1.1% last quarter and 1.13% as of December 31, 2016.
This ratio, of course, is impacted by our acquisitions of West Coast, Intermountain and Pacific Continental as those loans were acquired at fair value.
Embedded in those valuations is approximately $36 million of discount.
Approximately $24.5 million is associated with the Pacific Continental portfolio.
For the quarter, nonperforming assets increased $35.5 million, with $19.1 million in nonperforming assets coming due to the Pacific Continental acquisition.
The increases were largely in the commercial portfolio and the commercial real estate portfolio.
The nonperforming assets to total asset ratio increased to 63 basis points, up from 45 basis points last quarter.
This increase is primarily due to one large maritime credit, so we describe it as situational rather than systemic.
In summary, it was an interesting quarter that provided some mixed results.
Past dues came in around 28 basis points.
NPAs were up a bit from 45 to 63 basis points.
However, our impaired asset-to-capital ratio remained steady at 20%, and we also enjoyed net recoveries for the quarter.
I will now turn the call back to <UNK>.
Thanks, Andy.
We expect the Northwest to continue growing faster than the national economy, but tight labor markets are creating headwinds.
The region continues to enjoy steady [immigration].
However, the cost and availability of housing is slowing the pace of growth in the labor pool relative to demand and putting upward pressure on wage rates.
Tight labor markets surfaced as the primary concern for Northwest business owners we surveyed during the fourth quarter.
Survey results also revealed that confidence about business conditions remained positive, yet business owners still remained uncommitted to large capital expenditures and expressed limited appetite for additional debt.
It'll be interesting to see how loan demand responds following tax reform.
We do expect tax bill will increase capital spending, not by a large amount in the short term, but continually over time.
The Northwest has a concentration of businesses that produce capital equipment and software for commercial applications.
So higher levels of capital spending will certainly increase economic activity in the region.
As pointed out earlier by <UNK>, tax reform will reduce our tax burden going forward.
We plan to use future tax savings to raise our minimum wage rate to $15 per hour and expand our employee training and development programs.
We believe the increased minimum wage will make an immediate positive impact on the financial well-being of our nonexempt employees, and expanding training programs will help prepare employees for future career opportunities.
We also intend to use allocated tax savings towards the accelerated implementation of new technologies that enhance our capacity to serve our customers.
Increased community support is part of our plan as well.
One component of this effort will be increasing the funding of the bank's nonprofit employee-direct giving program.
This program helps those in need in communities where we do business.
At this point, we expect roughly 65% to 70% of our tax burden to fall to the bottom line.
In closing, we're certainly pleased to be ranked 11th on the 2018 Forbes annual list of America's best banks.
Our fourth quarter dividend of $0.22 per common share will be paid on February 21 to shareholders of record as of the close of business on February 7.
This dividend constitutes a payout ratio of 96% for the quarter and a dividend yield of 1.95% based on the closing price of our stock on January 24.
This concludes our prepared comments this afternoon.
As a reminder, <UNK> <UNK> and Andy <UNK> are here with me to answer your questions.
Now, Charlotte, we'll open the call for questions.
Just a follow-up on the margin holding up well comment.
Just kind of ---+ if you can engage with that a little more color on the environment that you're assuming within that and maybe a little more detail on the margin.
Sure.
As we've talked in the past, there's a lot of different variables that play into what the margin's going to do.
If the yield curve is flat under our simulations, that's not as beneficial to us.
But when we look at where we were at from a stand-alone, pre-Pacific Continental point of view, we've done a pretty good job of talking about loans with floors, the repricing characteristics within our portfolio.
And what we've seen now that we've combined the 2 companies is that the ---+ our asset sensitivity is slightly less, but it's still very much asset sensitive in our view.
When we look at loans that are supported by floors ---+ in-the-money floors, on a combined basis, it's right at $900 million of in-the-money floors.
$458 million roughly, so about 51% of those will come off their floors in the next 25 basis points of rate movement.
That's, I guess, one of the factors that I'm looking at.
The wild card's what happens with deposits.
We're looking at our marketplace and it appears that so far people are remaining, I guess, diligent in their pricing and we're not seeing a shift in the market.
There's certain places where we'll see some pressure.
Our cost of funds did go from 5 basis points to 8 basis points during the quarter.
That's simply a product of bringing the Pacific Continental activity on and higher level of certain types of deposits that carry a little higher price, but that's certainly something that we had incorporated into our model and doesn't cause us any concern or causes to pause.
Okay.
So it sounds as if you're fairly positive ahead of PCBK, and it moderated a bit but still flat to up is kind of the expectation.
I would say ---+ I typically tend to ---+ if we went back to the transcripts over the years, I think that this is as positive as I've been on the margin the last couple of quarters.
And I would say that I haven't tempered my thoughts around the resiliency of the margin from where I was at a quarter or 2 quarters ago to where we're at now that we've closed the Pacific Continental deal.
Great.
And then just one on the credit side.
You mentioned the maritime credit ---+ the size of that or any other detail that you could offer.
I assume, that's a legacy credit.
Yes, it's a COLB credit that goes back many years.
A large portion of their operation, actually, while they're headquartered here in the Northwest, occurs down in the Gulf and contracts that they had associated with the oil industry finally came to maturity.
Obviously, the activity down there has not sustained itself, so they were unable to get new contracts.
Some of that was mitigated by hurricane relief actions, but the net result is that things are pretty tough down in the Gulf.
This is our only borrower with activity down there.
And unfortunately, it didn't go well.
It represents about $17 million of exposure to Columbia.
Okay.
And then if you look at the NPA total in general, and maybe this is more specific to the PCBK portfolio, but anything lumpy in there or more headed that's quicker for resolution, now that you've got your hands around it.
We still have the large ag credit from several quarters ago.
And I think that when you add that with the maritime credit, you're looking at a big chunk, almost 45% of our NPAs, give or take ---+ a little less than that, I guess.
And both of those are going to be long-term workout.
So we've got some smaller stuff that will resolve itself, but we don't have anything that will be immediately impactful.
Well, the growth rates that I think make sense to think about are mid-single digits.
Yes, it's ---+ the pipeline's down a little bit.
Part of it's ---+ we had a lot of relatively high production in the fourth quarter, $378 million of production.
About $30 million of that was accelerated based off of initial language in the tax reform package.
And so we had some private bond ---+ private activity bond issuers that were concerned that, that vehicle is not going to survive tax reform and proactively accelerated their borrowing needs.
So that pulled a little bit of the pipe from Q1 into year-end that was about $30 million.
It's ---+ I think our production folks do a really good job of building existing relationships and also going out and finding new ones.
And so, I guess, we're not concerned about their ability to do that.
We are seeing some increased competitive pressures and that certainly impacts totals.
We're seeing some of the large national banks continue to move down market, where they haven't been real aggressive before.
I think they're looking at small business as a way to augment some things that are churning in their consumer areas.
And then some of the large credit unions continue to move upmarket and do things we've never seen them do before, and with structures that, quite honestly, banks wouldn't do.
So that's creating some headwinds for us as well.
And that's why when you asked about our expectation and outlook, we're thinking mid-single digits as opposed to the high single digits.
Yes, let me ---+ we have a reconciliation in the back of the earnings release.
Yes, I think the biggest thing you're going to see there is the correction of our premium amortization that was about a little over $1.7 million.
And that stems from, if you think back to ---+ I believe it was 2014, when we changed how we calculate our prepayment fees and the amortization of premiums on our mortgage-backed securities, that that's our service provider that does the calculation for us.
They're off 1 decimal place when they created that algorithm back in 2014.
They caught us this quarter, notified us late in the quarter and we made that adjustment.
So I think that's what you're seeing as that nuance between the reported NIM and the operating NIM.
If we think about just the coupon, because it takes out all the ---+ all of the income noise and everything.
So if we're just looking at what we're writing it at for a note rate, the portfolio, I believe, was at 4.64% at quarter-end and our new production in the quarter was, I want to say, at 4.67%.
Let me find my report here.
So that's something that ---+ yes, the portfolio production during the quarter was, yes, 4.67%, the portfolio's at 4.64%.
So that's something that we've been swimming upstream against for several years during the low rate environment was to get the new origination rates above the portfolio rates.
And so I think that's a positive, and that's another reason, I guess, to tag on to Jeff's question as to why we're more optimistic about the resiliency of the NIM as well.
Matt, the conversion, it actually is in March.
Yes, so I wouldn't say that it's ---+ I mean, we feel really good about that.
We've implemented 60% of the saves.
The majority of that's in compensation.
That's also because that's where the majority of the estimates were ---+ or the saves were going to occur.
The timing, I don't know that we'll see a lot of reduction in that or implementation of new cost saves during the first quarter, maybe right at the very end given the mid-March timing conversion.
What we'll see is early second quarter, once we're beyond the conversion, we'll start winding down some of that activity and then we'll accelerate the rest of the cost saves.
And I would say, there might still be a few trailing in post second quarter, but by the end of the second quarter, we're going to have the vast majority of those in place.
Yes.
I ---+ it was probably ---+ the reason ---+ I'm hesitating for 2 reasons.
First, I'm trying to stall because somebody is doing construction on the outside of the building, and I'm not sure if you can hear that or not.
The second reason is, I'm thinking about where we implemented that ---+ or where we closed in the second month of the quarter and it was probably 15 to 30 days post-closing where we saw some of the initial cost saves come in.
So to your question, it would've been later in the quarter, most of them starting mid-November time frame.
I think that it continues to improve.
I think that's why I caged it with the short term.
In the past, I've just said, kind of, where I thought the range would be, because we kind of keep it fairly ---+ doesn't move a lot from one quarter to the next and the next.
But I do think that we'll continue to see some improvement once we get everything fully integrated and realize the additional cost savings.
Yes, I think ---+ I want to clarify that I think it's the opposite.
We expect 65% to 70% of the reduced tax burden will fall at the bottom line.
And about 30% to 35% of it will be utilized for the initiatives that have been mentioned.
And the reason we put the percentage in their is we don't give guidance in terms of earnings, but you all have your models and that will give you the opportunity to take where your current view is on our overall earnings and factor in what we think we're going to be able to have fall to the bottom line.
One thing to keep in mind ---+ I was just going to say, one thing to keep in mind as well is in July, the Durbin amendment will take effect and impact our interchange revenue.
That will start in February.
Yes, we'll have to have business plans for some of the technology, for example, and those will take time and so the expenses will drop in over time.
Well, the before tax amount on an annualized basis is $10 million.
Yes, just give me a sec.
It went from 48.2% to 45.9%.
And some of that is related to the seasonal nature of some of our businesses, like ag.
And then, we saw a contraction in the finance company book, specifically the mortgage warehouse lines that we do.
There just seemed to be a decrease in activity at the end of the year.
And then one of our larger clients raised a fair amount of capital in the public markets and used that money, and they're now redeploying that money in an acquisition.
So we expect some bounce back in the finance company activity in the first quarter.
Sure.
While we've continued to have a strong interest in M&A as part of our go-forward strategy, there's essentially going to be no change in our process for evaluating opportunities, starting first with compatible cultures and comparable risk appetites.
We prefer to stay in our existing footprint, but are prepared to consider new markets in the West, but that would be on an exception basis.
Again, we're looking for, primarily, end-market candidates that we can partner with and continue to deepen our presence here and grow.
Are you referring to the tax benefit that we're reallocating.
Okay.
We considered the savings overall to fall 30% to 35% of what the benefit will be and we approached it on the basis essentially of really trying to stay very compatible with the things that run through our culture, which is employees, customers, communities and the choices we made in that regard include the $15 minimum wage.
And as I mentioned, that goes into effect February.
On the technology side, we're looking at integrating our distribution channels and building out our digital capabilities, and we're upgrading a number of our products that we have particularly as it relates to online and mobile and with our corporate platform for treasury management.
So dollars are earmarked for projects that fall in that particular area.
And again, as I mentioned, the business cases need to be fully vetted before we make our selections, but we have the priorities established and are prepared to go forward.
And then with regard to our community-based giving, we've identified ---+ we've got a nonprofit employee-directed fund that will contribute to and allow our employees to make decisions on how they support communities that they're doing business in.
So the timing of that will be probably in the second quarter when some of that expense filters through on the community side, and it will be accelerating on the technology side probably in the third quarter.
Yes, that's been pretty stable.
We haven't seen widespread changes in our marketplace and we actively track deposit pricing and DDA attrition as ways to hone in on what's going on.
We're holding the course for now, but we're ready to respond if necessary.
We have dialogue with our large depositors on an ongoing basis.
We're prepared to make some situational adjustments if it makes sense.
We're also positioned with product that we can roll out for select customer groups rather than reprice entire customer segments.
So if deposits start to move, we think that we have some strategies on the shelf that we can execute.
But for the time being, we're not seeing widespread movement in deposit pricing.
You bet.
What we're doing on the CFO search is, we have a very disciplined process and we're committed to take the time required.
We're still in the search.
Both <UNK> and I feel very well supported by our team members who have stepped up to help us distribute the workload.
So we feel that we're well positioned to continue the search as we are.
And if you know of anybody, let me know.
Okay, thank you very much.
Good afternoon, everyone.
