COLB
#Thank you, Cheryl.
Good afternoon, everyone and thank you for joining us on today's call to discuss our second quarter 2016 results, which were released before the market opened this morning.
The release is available on our website, columbiabank.com.
As we outlined in our release, this was a good quarter for us.
Our second quarter results have traditionally been strong and with the earnings of $25.4 million, this quarter was no exception.
Our loan production was second highest in our history at just under $340 million, thanks to the talented bankers throughout our footprint.
I said last quarter that our credit portfolio doesn't keep me up at night.
Our non-performing assets to period end assets ratio this quarter was 0.36%, the lowest in eight years.
As we move forward, our priorities will continue to be growing quality loans, improving our operating leverage and effectively utilizing capital.
On the call with me today are <UNK> <UNK>, Columbia's Chief Financial Officer, who will begin our call by providing details of our earnings performance; and then <UNK> <UNK>, our Chief Operating Officer, will cover our production areas; and finally, <UNK> <UNK>, our Chief Credit Officer, will review our credit quality information.
I'll conclude by providing our take on the economy here in the northwest, including Washington, Oregon and Idaho.
We'll then be happy to answer your questions.
Of course, I need to remind you that we will be making some forward-looking statements today, which are subject to economic and other factors.
For a full discussion of the risks and uncertainties associated with the forward-looking statements, please refer to our securities filings, and in particular, our Form 10-K filed with the SEC for the year 2015.
At this point, I'd like to turn the call over to <UNK> to talk about our financial performance.
Good afternoon, everyone.
Earlier today, we reported earnings of $0.44 per diluted common share.
Our reported net interest income increased $2 million from the prior quarter.
The linked-quarter change was driven by an increase of $279 million in average earning assets.
Non-interest income, before the change in the FDIC loss-sharing asset, was $22.9 million in the current quarter, up from $21.7 million in the prior quarter.
The increase was due mostly to higher loan, card and merchant processing revenues.
Loan-related revenue was up $540,000 on a linked-quarter basis, driven by increases in loan fee income and interest rate swap income of $285,000 and $190,000, respectively.
Our volumes of card and merchant processing transactions resulted in an increase in non-interest income of $569,000 over the prior quarter.
We continued to see improvement in our mortgage banking revenues, but at $600,000 for the quarter, it remains a small part of our non-interest income.
Reported non-interest expense was $63.8 million for the current quarter, a decrease of $1.3 million from the prior quarter.
However, the prior quarter's reported number was viewed higher with $2.4 million of acquisition-related expense.
After removing the effect of acquisition-related expenses, OREO activity and FDIC clawback liability expense, our non-interest run rate for the quarter was $63.6 million.
This is a $1.3 million increase from $62.3 million on the same basis during the prior quarter.
This increase is primarily attributed to higher incentive compensation expense as well as timing related items, such as advertising expense, and legal and professional fees.
Last quarter, our reported occupancy expense of $10.2 million, included $2.4 million of acquisition-related expense.
After removing the effect of acquisition-related expense, our first quarter occupancy run rate of $7.8 million was consistent with the current quarter's expense of $7.7 million.
Excluding OREO activity and FDIC clawback liability expense, our non-interest expense to average assets ratio was 2.76%, down from 2.79% in the first quarter.
Please remember that, for comparative purposes, the calculations for prior quarters also excludes acquisition expense.
On last quarter's call, I mentioned that our expense ratio would likely remain within the 2.79% to 2.89% range in the near term.
Robust asset growth during the current quarter was enough to lower this ratio further, despite the modest uptick in expenses.
We still anticipate that our expense ratio will move within this range as we continue to make infrastructure investments in areas we believe will further enhance our long-term competitiveness and profitability.
Our current expectation is a quarterly expense run rate of $63 million to $65 million.
The operating and interest margin declined 3 basis points during the quarter, as a result of a slight shift in our average earning assets mix.
During the quarter, investment balances increased 48 basis points to 27.3% of average earning assets.
Now, I'll turn the call over to <UNK> to discuss our production results.
Thank you, <UNK>.
Total deposits at June 30, 2016, were $7.67 billion, an increase of $76 million from $7.6 billion at March 31, 2016.
On a year-to-date basis, total deposits have increased $234 million, or about 3.2%.
About $145 million of this increase was a noninterest-bearing DDA.
Core deposits were $7.45 billion, which represents 97% of the total deposits.
The average rate on interest-bearing deposits remained low at 8 basis points compared to 7 basis points for the prior quarter.
The average rate on total deposits remained unchanged at 4 basis points.
About 54% of our deposits are linked to business and 46% to consumers.
Our branches continue as the most important touch point for our customers and represent one of our largest investments.
We evaluate the performance of our branches on an ongoing basis and look for opportunities to improve the customer experience and become more efficient.
This discipline has positioned us to identify opportunities to consolidate 10 branches over the last 18 months.
Loans were $6.11 billion at June 30, 2016, representing a net increase of about $230 million or a 3.9%, over the first quarter of 2016.
The second quarter increase was largely driven by significant levels of new loan production in the amount of $338 million and more active line utilization.
Line utilization increased from 52.6% in the first quarter to 54.5% in the second quarter as seasonal borrowings became more actively, most notably in agriculture.
Historically, agricultural activity builds in the second and third quarters and then recedes in the fourth and first quarters.
New production was predominantly in commercial real estate and construction loans and C&I.
Term loans accounted for $220 million of total new production, while new lines represented $118 million.
The mix in new production was fairly granular in terms of size.
22% of new production was over $5 million; 25% was in the range of $1 million to $5 million; and 53% was under $1 million.
In terms of geography, 59% of the new production was generated in Washington; 26% in Oregon; and 15% in Idaho and a few other states.
Following the pattern of new production, net loan growth in the second quarter was concentrated in commercial real estate and C&I.
Commercial real estate and construction loans ended the second quarter at $3.14 billion, up about $127 million from the prior quarter.
The mix of asset types was well diversified.
For the first quarter, the largest increase by asset type were the following; hotel/motel, multifamily and office.
C&I loans ended the second quarter at $2.52 billion, up about $117 million from the previous quarter.
Industry segments with the highest loan growth in the second quarter include agriculture, finance and insurance, construction and health care.
During the second quarter, the tax adjusted weighted average coupon rate for the loan portfolio was 4.36%.
The average coupon rate for new production was 4.20%, well below the loan portfolio coupon rate.
Under current market and competitive conditions, this GAAP is likely to continue.
However, we've seen a pace of decline in the tax adjusted portfolio coupon rate begin to diminish.
The tax adjusted coupon rate for the loan portfolio declined from 4.40%, as of December 31, 2015, to 4.36% at June 30, 2016.
For the same period during the previous year, the tax adjusted coupon rate dropped from 4.54% to 4.44%.
And looking forward, the bank's deal flow remains active and the pipeline volumes are holding fairly steady.
I expect positive net loan growth in the third quarter.
That concludes my comments.
I will now turn the call over to <UNK>.
Thanks, <UNK>.
For the quarter, we had our provision for loan losses of $3.6 million.
As you know, we maintained separate allowance accounts for the different portfolios.
The breakout of provision expense by portfolio is as follows.
The originated portfolio had a provision of $3.75 million; the discounted portfolio had a release of $200,000; and the purchase credit impaired portfolio had a provision of $91,000.
The provisions were driven by charge-offs and loan growth in the originated portfolio, net recoveries and the continued contraction of ---+ in the discounted portfolio and a change in expected cash flows in the purchase credit impaired portfolio.
I would like to add a little more color concerning loan growth.
For the quarter, across all portfolios, loan growth was approximately $230 million.
However, loan growth within the originated portfolio was $300 million, as the discounted and PCI portfolios contracted by $58 million and $12 million, respectively.
So as you can see, loan growth had an impact on the provision for the quarter.
We had net charge-offs of $2.8 million for the quarter, split between the originated portfolio, which had net charge-offs of $2.3 million, and the purchase credit impaired portfolio, which had net charge-offs of $610,000.
The discounted portfolios had mixed results, with a consolidated net recovery of $90,000.
So when you put all together for the quarter, net charge-offs amounted to about 23 basis points on an annualized basis, down from last quarter's 28 basis points.
So as of June 30, 2016, our allowance to total loans was 1.13% compared to 1.18% as of March 31, 2016.
The modest decrease in the provision to total loans continues to reflect the overall credit quality of our loan portfolio.
This quality can be seen in our impaired asset quality ratio, which remains extremely low at 12.7%, our reserves cover non-performing loans by a margin of 3 times and OREO is a modest $10.6 million.
For the quarter, non-performing assets decreased $14 million, primarily due to a decrease in non-performing loan.
As a result, MPAs were about $35 million or 38 basis points of period-end assets.
As we discussed last quarter, we anticipate to keep bouncing around at these low levels.
At quarter-end, loans 30 days, or more past due and not on non-accrual, were about $10.4 million or 18 basis points.
This is up from last quarter when past dues were around $8.4 million or 15 basis points.
In summary, we are pleased with how the portfolio is performing.
That concludes my comments.
And I will now turn the call back over to <UNK>.
Thanks, <UNK>.
The economies in our three state area, consisting of Washington, Oregon and Idaho are as diverse as our landscape.
However, leading economic indicators in this part of the country, particularly in the metro areas, are continuing their forward momentum.
Overall, we have excellent job creation and strong gross domestic product.
Washington and Oregon are Number 1 and Number 2, respectively for personal income growth in the country.
And the population in labor force of all three states continues to grow.
While Washington added more than 101,000 jobs over the last year, the unemployment rate for June held steady at 5.8%, where it's been since last December.
This is due to the concurrent growth in the labor force, which increased by over 97,000 from a year ago.
Over 33,000 were in the greater Puget Sound area.
Seattle now ranks fourth for growth among the 50 biggest cities.
And as Seattle Times' columnists recently noted, Unless Amazon stops hiring, you may as well get used to it.
Unemployment data for Oregon continues to bring good news, even though the unemployment rate ticked up to 4.8% in June from 4.5% in May.
This is far below the 5.8% level posted a year ago and slightly lower than the national average today.
The state's labor force grew to an all-time high of over 2 million last month.
However, recent job gains have been more than enough to keep pace with population growth.
In fact, Oregon reached a milestone in terms of recovery and expansion.
Not only has the state added enough jobs to regain all of the great recession losses, they have caught back up with the population growth.
Even as the economy faltered, people were still moving to Oregon.
Idaho's employment picture continues to be quite healthy.
For the third consecutive month, the state's employment rate has been a low 3.7% compared to 4.2% a year ago.
The US Census Bureau recently reported that the state ranked fifth nationally for overall job creation coming out of the great recession.
We often get questions about the rural agricultural place in our economy, so I thought I'd briefly cover some highlights.
Agriculture has remained a key component of our economic success.
We are very lucky to live and work in the northwest, with our diverse climate, rich soil and usually abundant water.
Washington is Number 1 in apples and hops in the country.
Oregon is Number 1 for Christmas trees, hazelnuts and all different types of berries.
And you won't be surprised to hear that Idaho produces the most potatoes in the United States, but it also produces the most food-sized crowd.
In 2014, the state reported $16 billion worth of food and agriculture products to people around the world, half of which were grown right here in Washington.
In Oregon, agriculture directly or indirectly supports more than 325,000 full or part-time jobs, making up almost 14% of total jobs in the state.
And Idaho generates $25 billion in sales or over 20% of the state's total economic output.
Our ports are very important to our region as well.
They certainly help us to move all that agricultural production.
Northwest Seaport Alliance, the consolidated container operation of the Port of Seattle and the Port of Tacoma, reported container imports grew 4% month-over-month in June, the highest June volume in the past four years.
However, the weakened Alaskan economy, due to the low oil prices, has hurt domestic volumes, which are down 11% year-to-date.
We're closely watching economic indicators in light of concerns about international economic conditions, particularly in China as well as more regional concerns.
And we regularly survey our business customers throughout our market area in a variety of industry segments to better understand the economic conditions and identify what they see as opportunities in areas of concern.
Our recently completed second quarter survey revealed that over 90% of our business customers remain confident in the future of their own business.
And in fact, their feelings about their industry's business conditions were at an all-time high, particularly in retail.
However, there was no improvement from last quarter's survey about the uncertainty regarding the political climate, which continued to be the second-most frequently cited reason to postpone expanding their business.
And just under one quarter of the business owners are planning capital expenditures in the next 3 months to 6 months.
Government regulations and taxes continued to be the top issue most of our customers face in their companies.
So to summarize, our diversed economies and our part of the country continued to perform better than most, and we continue to be optimistic about our future here in the northwest.
I'd like to wrap up by talking a little bit about our dividend.
Our financial performance and our optimism about our continued opportunities in the northwest help us to support our decision to increase our regular cash dividend to $0.20 per common share.
This is a 5% increase from the regular dividend we paid during the second quarter, and an 11% increase from the regular dividend paid during the first quarter of this year.
For the 10th consecutive quarter, we are also paying a special cash dividend, which will be $0.19 per common share.
Both dividends will be paid on August 24 to shareholders of record as of August 10, 2016.
The total dividend payout of $0.39 constitutes a payout ratio of 89% for the quarter, and a dividend yield of 5.2%, based on yesterday's closing price.
So with that, this concludes our prepared remarks this afternoon.
As a reminder, we have <UNK> <UNK>, <UNK> <UNK> and <UNK> <UNK> here with me to answer questions.
And now Cheryl, we'll open the call for questions.
<UNK> or <UNK>.
<UNK>.
Well, I'll start with deposits, and you can talk about FHLB advances.
Deposit growth for the quarter was really driven by the business side of our portfolio.
And that we didn't see much lift in the consumer side, and a lot of that is attributed to, I believe, the reward for deposits.
We're not able to provide high levels of rewards for deposits.
And so the consumer side of the deposit business is steady and static, but businesses where we're seeing growth that we do have.
And I would probably anticipate the growth rate to be at about the same pace in the future.
I'll just add on the Federal Home Loan Bank advances.
Our strategy as it relates to overnight funds is to manage them at or near zero.
And so what happens is, from time to time, we'll have some deposit inflows and cash flows off the portfolio.
We put those to work, and then maybe loan growth kicks in.
And so it does create, just if you're looking at it a point in time, like the balance sheet does, the potential that one day, one week, a couple of weeks it could be $100 million, $200 million of borrowings and/or $100 million or $200 million in overnight funds.
So our strategy hasn't really changed, but when you look at it over the course of several months or the year, I think you'll see that we tend to be at or near zero with our overnight funds and borrowings as well.
No, no, not with the borrowings.
Now, we have extended the duration a little bit on some of the things that we are putting into the investment portfolio.
The portfolio duration is still 3.7 years, an instantaneous shock of 300 basis points.
It did only extend to 4.2 years.
So we certainly have flexibility.
But with respect to the advances, that's not an interest rate risk play.
No.
It's just that our prior repurchase program had expired.
And we always like to have as many tools in our tool chest as we can.
It's just another tool, so it just kind of rounds everything else for us.
Well, we still have enough capital that we believe that we've got a lot of dry powder.
So doing the special dividend has just been one of the levers that we've used.
And we don't want to send a signal that we are not interested in doing acquisitions at all or that we wouldn't be able to them from a capital perspective.
I suppose that, that is how you could interpret that.
The regular dividend was increased this quarter.
I think that, that would be the stronger message how confident we are in our earnings.
And we just look at it every quarter and kind of look at what the potential acquisition targets might be out there and how it all relates.
And then, of course, you look at your different loan backups and how the loan portfolio is growing.
So it's all a big picture and a lot of different factors that go into those discussions.
As we talked last quarter, it was impacted by a couple of credits, and we were able to resolve those.
So what bumped us up last quarter is ---+ a lot of that was resolved this quarter, and so we were able to get back down.
So, one, as I had mentioned to you before, was a real estate transaction, that property got sold.
So that kind of resolved that issue.
The other one was a food-related company and they sold to a larger national competitor and so we got paid off on that one.
Actually, it's pretty static compared to what we saw in the first quarter.
So first and second quarter is pretty consistent.
And my expectation is, is it will hold that way into the third quarter.
I think a lot of the list in Idaho is related to ag borrowings as they've come on in the second quarter, plus we've been able to identify some new clients that were reasonably sizable, so it made a difference there.
I think that the activity in Idaho is fine and we expect to grow that market over time.
As you would expect, it just takes time to build a rhythm and that's what we're in the process of doing.
There is one thing to factor into that.
The thinking is what's coming up for repayment in the next year.
We've got about $1.3 billion that's churning over and that, of that $1.3 billion, the coupon rate on that is about 4.17%.
And so what you can see is that the new production, and what we expect to turn over, at least given the results of this last quarter, are fairly within the same range.
And so part of the answer to your question is I would expect that differential to remain and in part, I'm thinking about what I just spoke to regarding the portfolio that's turning over and the pricing that we've got on it.
Hopefully, that's helpful for you.
I mean if you look at the bank's performance over the like seven or eight quarters, I think our provision averaged out about $3.2 million, $3.3 million.
And I wouldn't expect the provision to be all that different.
We might be a little bit under that, we might be a little bit over that, but it's going to be in that range.
Well, I think that if you want to go back in time, I'd say at the beginning of 2010 and I'm going to ---+ this is going to be an approximation, there's about 39 branches that have been consolidated, some of which of, course, are related to the M&A activity that we've had.
And we've had an ongoing effort over that period of time and looking at our branches and developing performance-related criteria that represents what we'd like to achieve.
And that we never really are in a hurry to close branches, preferring to find ways to make those locations profitable and accretive for the bank.
And that ---+ in cases where we feel that there are better ways to achieve that, meaning consolidating with another branch, we do that.
So it's an ongoing effort and it's a well thought out disciplined approach.
And so I would expect that to be a story going forward.
But there's not like a big bulk of branches that we're looking at right now.
Yes.
Just a second, I'll get it for you.
Go ahead and ask another question.
I'll find it.
Feel like we need a little music here.
Well, I think if we just extrapolate where we're at today and how we got there, then it looks like a 2017 organic event.
But that doesn't mean that an acquisition couldn't take as well over that number.
In either way, we are prepared for it.
Organically, it's just going to cost us more money initially until we make up the impact from the Durbin amendment.
<UNK>, the payoff activity or prepay activity for the second quarter was about $100 million.
First quarter was about $81 million.
We updated that number, the $7 million was when we looked at our full-year 2014 activity.
Based on 2015, it's just a touch over $9 million pretax.
It's seasonal and I think that's most of the activity.
Yes, there's normally kind of a push here at the year-end, and then it goes down, as you go through the holiday season and then it tapers off.
Well, we've got a fair number of construction projects that we'll continue to draw down over the next 36 months.
And so we've got a decent pipeline of that type of activity.
And I think that we're fairly selective, as we've said before, as it relates to construction activity that's related to multifamily.
So we're carefully moving forward with that, saving room for customers that we've done business with over the years that have the type of projects that fit our credit criteria.
But the construction book, I'm feeling reasonably good about it actually.
Absolutely.
No.
What I was trying to highlight, because I read all your notes this morning, and expenses went up.
And so I was trying to do a better job of, I guess, articulating and I guess maybe I failed at that.
That from quarter-to-quarter, we kind of have a core run rate, but there's always something where ---+ whether it's one quarter versus another that maybe we have an advertising campaign going on, maybe it's legal or professional services, depending on when those hit.
And over the course of the year, you would look at it, it'd be a fairly smooth annual number.
But from quarter-to-quarter, it's not uncommon for us to have our expense base move around $1 million or $2 million.
And so I think that our goal hasn't changed.
And what we've said last quarter was we expect to see that ratio continue to trend down.
But we also know that, for example, in the first quarter, legal and professional and advertising came in a little lower than what I would have expected.
And you know, back to the timing element of it, in the second quarter, those came in higher than what they were in the first quarter.
And so you mix in that with asset growth ---+ we had really strong loan growth in the second quarter.
So that increased earning assets, I think, it was $279 million and those things helped the ratio.
I think that if we look at our expense run rate and kept our average assets flat with the first quarter, we would have come in at $285 million.
So just trying to give you guys two different ways of looking at it, give you a hard dollar kind of range of what we think would be normal course of business stuff, but then also give you the expense ratio, so that as we continue to grow and reinvest in the franchise, that you kind of have a way to gauge the improvement in our operating leverage.
Well, and I'll let <UNK> jump in here if he wants to add to this.
Because I know that mortgage production is something that he pays close attention to.
It was $600,000, as I mentioned in my prepared remarks.
And part of the reason I wanted to include it, even though it's a small piece of the total pie, was many of our competitors have a lot more substantial portion of their non-interest income coming from mortgage activity.
And so I wanted to highlight for you that our number is fairly modest in relation to nearly $23 million in total non-interest income.
For perspective, in the first quarter, that number was $513,000.
The fourth quarter of last year was $450,000.
So it is up, but $150,000 out of $600,000 and $600,000 out of $23 million, it's not a huge driver to the bottom line results.
<UNK>, anything you want to add.
I would just add that it's a business line that we spent some time trying to get better positioned and better organized and staffed with the right people and we believe that we have that.
And that I would expect over time, for you to see the mortgage component of our non-interest income start to grow and that's the intent.
I think 31% is a good estimate.
I mean from one quarter to the next, it might flip to either side of 31%, but when I look at it, 31% is kind of the number I typically plan on.
All right.
Well, thanks, everyone, for being with us today.
We really appreciate your interest and we hope you enjoy the rest of your summer.
Thanks.
