COLB
#Thank you Nicole.
Good afternoon everyone and thank you for joining us on today's call to discuss our third-quarter 2015 results which we released this morning.
The release is available on our website, ColumbiaBank.com.
As we outlined in our earnings release, we had record new look production during the quarter growing $348 million, our highest quarterly total in our history with just under $850 million for the first nine months of 2015.
This was the eighth consecutive quarter our bankers have achieved well over $200 million in new loan originations and along with the increases in non-interest income and careful management of expenses this helped us achieve our record earnings with net income of $25.8 million and diluted earnings per share of $0.45.
<UNK> <UNK>, Columbia's Chief Financial Officer, is also on the call with me today.
He will begin our call by providing details of our earnings performance.
<UNK> <UNK>, our Chief Operating Officer, will be covering our production areas this afternoon and <UNK> <UNK>, our Chief Credit Officer, will review our credit quality information.
I will then conclude by giving you a little bit of an update on the economy here in the Pacific Northwest including Washington, Oregon and Idaho.
We will then be happy to answer your questions.
But 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 forward-looking statements please refer to our securities filings and in particular our Form 10-K filed with the SEC for the year 2014.
At this point I'd like to turn the call over to <UNK> to talk about our financial performance.
Thank you, <UNK>.
This morning we reported third-quarter earnings of $25.8 million, or $0.45 per diluted common share.
We had many of the same items that have created noise in our numbers during previous quarters but this quarter they didn't materially influence our reported results.
We had $428,000 of pretax acquisition expense and OREO expense of $240,000 which were offset by an $826,000 benefit from the accounting impact of our acquired FDIC loan portfolios.
The combination of these items resulted in an increase to net income of approximately $100,000.
Our reported net interest income increased $684,000 over the prior quarter to $81.7 million.
The increase was driven by additional interest income on loans of $1.4 million after excluding the change in acquired loan accretion income.
Non-interest income before the change in the FDIC loss sharing asset was $24.1 million in the current quarter, up from $23 million in the prior quarter.
The change was primarily due to increased gain on loan sales which were up $1.1 million from the prior quarter.
On a core operating basis revenue increased $2.7 million over the prior quarter and $3.9 million or 4% over the first quarter of this year.
Reported non-interest expense was $64.1 million for the current quarter, down $4.4 million from the second quarter.
The decline was largely driven by acquisition expenses which were $5.2 million lower in the third quarter.
After removing the effect of acquisition related expenses, OREO activity and FDIC clawback liability expense our core non-interest expense run rate for the quarter was $63.2 million, down slightly from $63.4 million on the same basis during the second quarter but down nearly 3% from $65 million during the first quarter.
Most expense categories saw modest improvement with declines over the prior quarter.
However, some of the improvement was diluted by higher than usual fraud losses during the current quarter which increased $546,000 when compared to the second quarter.
As a result of both stable operating expenses and asset growth our core non-interest expense to assets ratio declined 5 basis points to 2.92% during the third quarter, achieving our target one quarter ahead of schedule.
We will work diligently to reduce this ratio further.
However, there are expense headwinds as we continue to make infrastructure investments in areas we believe will enhance our long-term profitability.
Sunday is the one-year anniversary of the closing of the Intermountain acquisition and we are pleased to report that during the third quarter we met our goal of $8.6 million in cost savings expected with this transaction.
Our bankers continue to do an amazing job delivering another quarter of record loan production and very strong deposit growth.
Our total cost of deposits and average cost of interest-bearing deposits continue to hold steady at 4 and 8 basis points respectively.
As a result, the operating net interest margin regained the 1 basis point it lost in the second quarter to match the first-quarter ratio of 4.18%.
Tangible book value per common share ended the quarter at $14.62, up from $14.29 at the end of the second quarter and our tangible common equity to tangible assets ratio was 10.1%.
Now I'll turn the call over to <UNK> to discuss our production results.
Thank you, <UNK>.
Total deposits at September 30, 2015 were $7.31 billion, an increase of $270 million from $7.04 billion at June 30, 2015.
About $180 million of this increase was in non-interest-bearing DDA.
On a year-to-date basis total deposits increased $390 million or about 5.6%.
Core deposits were $6.99 billion holding steady at 96% of total deposits.
Loans were $5.75 billion at September 30, 2015 representing a net increase of about $135 million or 2.4% over the second quarter.
Year-to-date loans were up $301 million or about 5.5%.
Third-quarter increase was largely driven by strong levels of new production at $348 million.
Line utilization played less of a factor in driving loan growth during the third-quarter, remaining essentially flat at 52.8%.
Assuming historical patterns hold we are likely to see line utilization to start drifting down.
Line activity in our C&I portfolio typically pulls back in the fourth quarter.
In this part ---+ this is linked to the pattern of borrowing activity related to our agricultural borrowers who apply crop proceeds to reduce operating line balances during this part of the year.
New production was predominantly centered in C&I and commercial real estate and construction loans.
Term loans accounted for roughly $225 million of new production while lines represented about $122 million.
The mix in new production was fairly granular in terms of size: 25% of new production was over $5 million, 36% was in the range of $1 million to $5 million and 39% was under $1 million.
In terms of geography, 69% of new production was generated by lending teams in Washington, 28% in Oregon and 3% in Idaho.
Following the pattern of new production, net loan growth in the third quarter was concentrated in C&I and commercial real estate.
C&I loans ended the third quarter at $2.35 billion, up about $100 million.
Industry segments with the highest loan growth include agriculture, finance and insurance and public administration.
Commercial real estate and construction loans ended the third quarter at $2.89 billion, up $53 million.
The commercial real estate asset types with the largest increase were office, warehouse and multifamily.
The low interest rate environment combined with competitive market conditions continues to put downward pressure on loan coupon rates.
The average tax adjusted coupon rate for quarterly new loan production declined from 4.08% in the second quarter to 4.02% in the third quarter.
The average tax adjusted coupon rate for the overall loan portfolio trended down as well from 4.44% at June 30 to 4.39% at quarter-end.
While market conditions across our footprint are highly competitive our deal flow remains active and I expect to see positive net loan growth in the fourth quarter.
That concludes my comments.
I will now turn the call over to <UNK>.
Thanks.
For the quarter the Company had a provision of $2.8 million which was once again driven by the originated portfolio which required a provision of $5.250 million.
The provision was again driven by loan growth, net charge-offs and modest migration trends experienced during the quarter.
Offsetting the provision for the originated portfolio we were able to release $520,000 from the purchased credit-impaired allowance and $1.9 million from the discounted allowance provision.
We had net charge-offs of $3 million for the quarter evenly split between the originated portfolio which had $1.6 million and the purchased credit-impaired portfolio which had $1.7 million.
The discounted portfolios had modest recoveries for the quarter.
In total that equates to about 5 basis points for the quarter.
So as of September 30, our allowance to total loans was about 1.2%, down from 1.23% at June 30 and 1.28% at year-end 2014.
Our allowance to nonperforming loans as of September 30 is 362%, up from 269% last quarter.
Key to the improvement in this ratio was the decline in nonperforming loans during the quarter.
For the quarter nonperforming assets declined $7.8 million or 17% thanks to declines in both nonperforming loans and OREO.
Nonperforming loans now represent just 33 basis points of period-end loans while nonperforming assets represent just 44 basis points.
Past-due loans at quarter-end word 20 basis points compared to last quarter when they were 23 basis points.
With that I will turn the call back to <UNK>.
Thanks, <UNK>.
While economic indicators have been somewhat mixed over the past quarter both for the United States and internationally it appears that forward momentum is still very strong in the Pacific Northwest.
However, we're carefully monitoring global economic conditions and the potential effect on our trade dependent companies.
The Kiplinger newsletter is forecasting that Oregon, Idaho and Washington will be in the top 10 states with the fastest-growing job growth for both this year and looking forward to the end of 2016.
The pace of retail sales grew faster in our two largest metropolitan areas than anywhere else in the nation the past quarter.
That would be Portland, Oregon growing over 9% and Seattle taking second at 6%.
In comparison sales increased 1.8% nationally.
The NAIOP, which is the National Real Estate Development Association, ranks Washington the eighth most active state for real estate development.
This is notably since we're the 13th largest state by population.
The development of office building, warehouses and retail space generated more than $5 billion in direct expenditures and supported nearly 80,000 jobs.
With our population and as our population continues to grow Washington is the 10th fastest-growing state primarily due to the booming Seattle-Puget Sound area.
The state climbed past the $7 million mark last year, adding over 90,000 in a single year and increasing its population by 1.29%.
They Seattle-Tacoma-Bellevue area was responsible for almost 70% of added Washington residents.
For you history buffs the Seattle Times recently reported that the city's population is approaching Gold Rush growth levels.
To find a time when Seattle grew faster than it has in the past two years you'd have to go back to the first decade of the 20th century and the period right after the Klondike Gold Rush.
Driven by tech hiring particularly by Amazon, Seattle's wrote growth is as fast as it's ever been.
Washington's jobless rate continued to drop, hitting a seven-year low.
However, hiring across the state slipped a bit in September as the labor force shrank and of the number of jobs fell by around 2,000.
The state's September unemployment rate was 5.2%, down from 5.3% the prior month, just a 10th higher than the US rate of 5.1% and a full point lower than 6.2% in September a year ago.
The Seattle Metro area unemployment in September was just 3.7%.
Washington State labor economist said he expects to see workforce participation, both national and state, to decline over the long term as more people move into retirement.
The Northwest Seaport Alliance reports that overall container volumes have improved 5% through the third quarter of this year, largely driven by full containerized imports.
Year-over-year imported full containers increased over 9% thanks to retailers who are increasing inventories and preparing for the holiday shopping season.
However, exports headed to international destinations dropped almost 11% through the third quarter, reflecting the stronger US dollar and decreasing demand from China and weaker economies overseas.
Indicators are a bit mixed in Oregon as well.
Despite strong payroll job gains in recent months Oregon's unemployment rate edged up slightly to 6.2% in September but improved from 6.9% a year ago.
The state also had 5,300 fewer workers, the first decline in 36 months.
The sectors showing the most decline were in construction, retail, professional and business services as well as leisure and hospitality.
The region, however, has regained more than twice the jobs lost during the recession and per capita personal income is approaching the prerecession highs experienced in 2007.
Oregon is continuing to outpace the nation in economic growth.
The state exported nearly $21 billion worth of products last year and is on pace to match that figure by the end of 2015.
Agriculture production accounts for $5.4 billion in the Oregon economy led by cattle production, greenhouse and nursery, hay, milk and grass seed rounding out the top five.
It has also been a great year for tourism in Oregon.
The lodging occupancy rate was over 90% in July and 2015 is shaping up to be a record-breaking year.
The number of visitors to the state's outdoor attractions are on pace to be the highest ever.
In Idaho the unemployment rate held steady at 4.2% in September while the state's labor force reached a record high of 800,000 people.
September saw an increase of 5,000 jobs which offset general seasonal declines across Idaho's economy.
Idaho has some of the strongest population and employment growth in the country.
According to the US Bureau of Labor Statistics, in the last year Idaho jumped to eighth in the nation in employment growth, up from 31st and ranked sixth in the nation for personal income growth.
Much of these upward trends is attributed to the state's economic stability, particularly agriculture which has been a strong and consistent economic driver.
The high-value agriculture industry makes up 1.2% of the national economy.
However, it makes up about 7% of Idaho's economy.
Idaho still expects agricultural exports to top $1 billion as they did in 2014.
Additionally economic drivers such as construction, manufacturing and trade contribute significantly to the state's economy making it significantly more stable than states invested in energy for example.
As many of you know we regularly survey our business customers throughout our market area to better understand their challenges, their opportunities and thoughts on the economic environment.
About 94% of our customers were confident about the future of their business.
This was true among all industries surveyed.
However, while most feel optimistic about the business conditions in general those in the construction, retail and manufacturing industries seem to be less optimistic with ratings below the average.
To summarize, the economy in our area continues to perform better than the country as a whole than most economic indicators and along with our business customers we are very optimistic about the future of the Pacific Northwest.
Our priorities going forward continue to be growing loans, improving operating leverage and effective utilization of capital.
We continue to feel very optimistic about our opportunities here in the Pacific Northwest which helps us support our decision to pay another special dividend of $0.18 in addition to a regular dividend of $0.18.
Both will be paid on November 25 to shareholders of record as of November 11.
We're pleased to pay a special cash dividend for the seventh consecutive quarter.
Both dividends totaling $0.36 constitute a payout ratio of 80% for the quarter and a dividend yield of 4.2% based on our closing price yesterday.
With that, this concludes our prepared comments this afternoon.
As a reminder, <UNK> <UNK>, <UNK> <UNK> and <UNK> <UNK> are with me to help answer your questions.
And now, Nicole, we'll open the call up for questions.
Well, some of it's related to just automation of processes in the back office, looking at how we can apply some automation in our customer facing areas, hardening our IT shell, cyber security, things of that nature.
I can't really give you specific details just because I'm not willing to open up our playbook for everybody that's on the call.
But it's not inconsistent with what we've done for many years where we've taken a long-term view and made these types of investments whether it's in new teams or new technologies.
And I think that with some of the things that <UNK> is looking to create with the production side in the banking solutions area there's going to be some investments that we're going to need to make over the next one to three years.
No, I would say that the full run rate is reflected in there.
And the reason I would say that is while we finalized those last handful of cost saves in the third quarter, our objective has always been that $63 million to $64 million range once we hit the one-year mark of the transaction.
That's what we talked about a year ago or a year-plus ago when we announced it.
And last quarter we were $63.4 million on an operating basis, down a couple hundred thousand dollars this quarter.
But realistically there's always things one quarter to the next that can create a little bit of noise and move the needle a few hundred thousand dollars one way or the other.
So while we might've received some benefit from those last few cost saves in the third quarter, there's a lot of moving pieces.
And so I'd say I wouldn't necessarily look for any incremental pickup in the fourth quarter related specifically just to cost savings.
I think that my comments were more associated with we are the most trade-dependent state in the country.
Of course a lot of it has to do with Boeing's very large exports.
But what we don't have a lot of color on yet is the extent of the port slowdown earlier this year and its long-term implications, particularly on agriculture.
And because some of the products that were actually exported or are exported they went to other ports.
And now that combined with China you just really want to make sure that you're not being too optimistic on the overall effect of just continuing slowing in any kind of exports, whether it's ag or clothing even.
We have companies here in the Pacific Northwest that export a lot of clothing to other parts of the world.
Yes, exactly.
Sure.
I guess I'll take it in pieces.
So I guess I should have made this point also when I responded to <UNK> is our non-interest expense to asset ratio is something that we're still committed to working towards lowering even beyond the level that we achieved this quarter.
So I don't know if that will help in terms of with <UNK>'s question about timing and amount and impact but as we grow expenses will grow as well most likely.
As we cross $10 billion we really feel like we've got that infrastructure in place.
We've been working hard on that for three-plus years.
We've had a lot of dialogue around it internally and we have the DFAST compliance stress test model that's operational.
We have the compliance function that's in place, many of the other things.
So as we cross over $10 billion it's really going to be volume-related items that would cause us to increase expense.
Additional production might lead to additional folks in our loan operations group, for example, or additional BSA analysts.
So we feel pretty good about where we're at there.
The interchange, loss of interchange revenue is something that we would hope we be able to replace with other revenue sources upon crossing $10 billion.
But for us that's a little over $7 million pretax right now.
I'll talk a little bit about you know the expenses for the quarter.
Looking at just the nature of the activity I think it was a special circumstance.
And the nature of the activity involving the loss was the result of fraudsters who acquired stolen debit cards from past third-party breaches and then created counterfeit debit cards for the purpose of running transactions not protected by authentication.
So upon detection what we did is we instituted corrective measures which quickly contained the losses and strengthened our ongoing fraud detection capabilities.
It's probably important to note, too, that as chip-based cards increasingly replace the existing card technology, further protection will be provided as well.
And as it relates to kind of the run rate second quarter was roughly $300,000, third quarter $800,000 rough numbers.
And the difference is largely this event that we think we've got isolated and contained.
But the fraudsters are busy.
Payoffs in the third quarter were not as much as they were in the second quarter.
What we've got coming down the pike and what my comments were focused on the expectations for the fourth quarter and typically we have pulled back on our lines of credit that take place about now and actually cross year-end and are in the first quarter and it's isolated largely to ag and construction.
But it's a pattern that we've seen before and one that I continue to expect.
In terms of prepayments for the third quarter, we're looking at maybe about $80 million in terms of a number.
And that's an amount that is below what we experienced in the second quarter.
I don't have the number front of me here.
You're welcome to call me.
Well we first of all I believe we have capacity within our existing team of lenders who have demonstrated the capacity to grow.
And I have to always suggest I'm on the lookout for opportunities to bring new members to our team as well.
And so that's a case-by-case evaluation and it's something that is an ongoing initiative.
Are you referring to the banking solutions group.
Okay.
As the bank grows we're scaling our organization accordingly.
And what we've done essentially is we've taken and concentrated the management of product management in one area which is the majority of the activity for this group.
And there are other activities including debit card, credit card in that as well.
But the concept is to get professional management over these product lines and to focus on growing non-interest income.
And there are plenty of complexities involved in managing products with compliance and so we want to do that very professionally.
So this group allows us to achieve growth in non-interest income, manage our compliance risk more proactively and go forward hopefully with growth.
At the end of the third quarter we have roughly $36 million of remaining net discounts on our non-PCI portfolios on and those are the PCI portfolios are the ones that we had lost sharing arrangements under or still have.
On those it's about $17.8 million of discount.
The accretion it will continue to wind down.
I think what you saw from the third quarter or the second quarter to the third quarter in terms of reduction will continue to play itself out.
The one thing that I guess the one wildcard there is the prepayments.
But all things being equal we wanted expect that next year accretion income will drop between $5 million and $6 million.
The line utilization in Q3 was 52.8%.
Second quarter was 52.9%.
My expectation is that I assume that will drift down a bit.
It's hard to predict but we do have an overall pattern that heads that way in the fourth quarter and somewhat in the first quarter as well.
Then it builds second and third quarter.
Right.
And volumes are difficult to predict but the pattern is there.
Sure.
Actually, comp was zero this quarter but we do still have some contractual things related to comp that will hit in the coming quarter.
So for the third quarter the 428 is broken out, there's $181,000 in occupancy, $40,000 in advertising, marketing type things, $71,000 in legal and professional services, $42,000 in data processing and then $94,000 just in miscellaneous.
So where we're at transaction to date is roughly $14.8 million.
We modeled $18 million.
Contractually what I do know is that we'll have roughly we expect roughly $800,000 in the fourth quarter and then there are some other things that occupancy type things that we're working through that may hit but I don't have a good number for what that is.
But I guess following up on the implementation of the cost saves that was really important to us to make sure that we hit that and reported back on that.
Same thing with the transaction costs, we'll continue to make sure we have visibility around that so that everyone knows where we ultimately end up.
But we're getting close.
Yes, I mean half of the provision is really associated with just the growth in the bank's loan portfolio in the originated bucket.
So thanks to <UNK> and his team he's really been doing a great job we've exhibited quite a bit of growth in that arena.
So that's driving $2.5 million, depending on which quarter it is $2.5 million to $3 million of provision expense.
The charge-offs in the non-PCI portfolio have really been running around 15 basis points on an annualized basis.
I would expect that would continue.
So you're really looking at activity levels in the provision consistent with the second and third quarter.
I'm trying to remember.
We're all trying to remember.
We believe that it's four this year.
You know, we always look for opportunities to become more efficient about how we're serving our customers but serving our customers comes first.
And just about all of our closures have been consolidations where we've had branches that we've acquired that are close to others and they're somewhat redundant branches.
We really have a long-term perspective on how we really determine whether or not branches are performing and we look at them in terms of kind of a hub-and-spoke situation.
So it's just an ongoing process, <UNK>, and I'm sorry I'm probably I should've let <UNK> answer this but we just continually look at it and weigh it against you know does it have customer impact.
The nice thing is that typically just through normal attrition we're able to find positions for those people who are being displaced by those branch consolidations.
So it all seems to work pretty well.
I think that there's still a lot of conversation.
One thing that may have slowed down some of the actual mergers is that peoples' earnings are coming back and just trying to reach a consensus on where companies should be trading at or really looking at earnings as a multiple.
And I just think that this has really been a year when companies have sat back and thought where are our earnings going, where are our expenses going.
I don't think the conversation is any less at all.
It's just that people are being very thoughtful about mergers and acquisitions.
It's really case specific I think.
I still believe that we're going to see more consolidation in the smaller banks just because it's very evident that unless we get at interest rate hike that it's going to be harder for a lot of companies to be able to improve their earnings just because they are not going to have much of a lift in terms of interest.
And so I think that there is probably going to be more at the lower end than the larger size banks.
Yes, yes.
Matt, if you're still out there I found the second-quarter information that you were looking for regarding pre-pays and it was $135 million.
All right.
Thanks everyone for joining us on the call.
Happy holidays ahead.
And we'll talk to you in the early part of 2016.
Bye.
