Columbia Banking System Inc (COLB) 2004 Q4 法說會逐字稿

Good afternoon, my name is Tina, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Columbia Bank fourth quarter and full year 2004 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer question. (OPERATOR'S INSTRUCTIONS.)

Melanie Dressel, President and CEO of Columbia Banking System, you may begin your conference.

Thank you, Tina. Good afternoon, everyone, and welcome to Columbia's conference call. Again, I'm Melanie Dressel, President and CEO of Columbia Banking System. And I have to apologize for my voice. I'm recovering from bronchitis, and I know I'm probably not very pleasant to listen to today.

Today we'll be briefly reviewing with you the information on our fourth quarter 2004 performance, as discussed in this morning's press release. I will summarize Columbia's highlights for the fourth quarter and the year 2004, and talk a bit about the economy of our area.

Joining me on the call today are Gary Schminkey, Mark Nelson and Andy McDonald. Gary Schminkey, EVP and CFO, will review our financial highlights. Mark Nelson, EVP and Chief Banking Officer, will cover our loan growth and branching strategies. And Andy McDonald, EVP and Chief Credit Officer, will discuss our credit quality. After our discussion, we will give you the opportunity to ask us questions.

Before we begin, I'd like to mention 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 forward-looking statements, please refer to our securities filings, and in particular our Form 10K filed with the SEC for the year 2003.

As I mentioned in the press release, we are very pleased to see our profitability continue to improve for the fourth quarter and the full year 2004. In fact, we had record earnings for both the fourth quarter and the year. We also reached the milestone of $2 billion in assets, reaching $2.2 billion at the end of the year.

Columbia had fourth quarter earnings of $6.5 million, which was up 19 percent from the fourth quarter of 2003, and our earnings for the year 2004 were $22.5 million, up 15 percent compared with 2003.

Diluted earnings per share for the fourth quarter were 41 cents, up 8 percent from the prior year; and for the year the diluted earnings per share were $1.52, up 11 percent from $1.37 in 2003.

Our record numbers are a result of increased interest income, loan growth and rising short-term interest rates. I'm especially pleased, because this is in spite of significant expenses we incurred relating to documentation compliance for Sarbanes-Oxley Section 404, which we'll talk about a little bit later.

Several things led to our success last year. First, we saw an improved regional economy. While the Puget Sound region as a whole has not recovered completely from the downturn of 2001, we have clearly turned the corner with employment up 2.1 percent, compared to only 1.3 percent for the United States in general. In addition, the majority of our branches are in Pierce County, where according to the Puget Sound Economic Forecaster Newsletter, we've seen a full-fledged expansion and one of the strongest economies in the region. The pace of economic growth in Pierce County has outstripped the national rate.

Another important factor in our success was our acquisition of Bank of Astoria on October of this year -- or last year. The Bank of Astoria brought $170 million in assets, and most importantly its very capable staff who share our culture and attitude about providing exceptional customer service. The bank is headquartered in Astoria, Oregon, and has five branches located in Astoria, Warrenton, Seaside, Cannon Beach and Manzanita. They're a high-performing organization with over 34 percent market share in Clatsop County, where they're headquartered. Bank of Astoria will continue to operate under its existing name and locations, and with the same management and board of directors.

At this point in time I would like to ask Gary Schminkey, EVP and CFO, to review some additional financial highlights.

Thank you, Melanie. To continue with Melanie's discussion of earnings, Columbia's net interest income for the fourth quarter increased to $20.5 million, or 26 percent from last year, primarily due to higher average earning assets for the period, coupled with increases in the prime rate and lower funding costs due to increasing core deposit totals.

Our net interest margins increased to 4.26 percent in the fourth quarter, up from 4.16 percent for the same period last year. The 25 basis point increases in the prime rate since June were the first in four years, and they have had a positive impact on our net interest income. The improvement in interest income as a result of increases in short-term rates has not been as dramatic as anticipated. Partially offsetting the increase in short-term rates have been decreases in long-term rates. So while commercial business loan rates are higher, commercial real estate loan rates have remained constant or have declined. Over 40 percent of our loans are tied to prime and other related indices, so we are very much positioned for rising short-term rates.

Non-interest income for the fourth quarter 2004 increased 8 percent over last year, mostly due to increases in service charges and other fees, as well as the continuing growth we've seen in merchant services income. Non-interest income for the full year decreased 2 percent compared with the full year 2003, primarily due to decreases in home refinancing activity.

Non-interest expense for the fourth quarter was $16.7 million, up 20 percent from $13.9 million for 2003, primarily due to the fourth quarter addition of the Bank of Astoria and the investment we made in the expansion of our King County lending group. For 2004, no interest expense was $61.3 million, up 10 percent from almost $56 million for the year 2003.

These increases included our costs for implementing the internal control requirements of Sarbanes-Oxley 404, which we refer to as SOX. We have incurred approximately $1 million in 2004, including $254,000 in the fourth quarter on SOX implementation, not including recurring audit expenses.

If we exclude SOX expenses, pro forma net income for the fourth quarter was $6.6 million, up 22 percent from the fourth quarter 2003, and pro forma earnings per share was 42 cents per diluted, an increase of 11 percent from one year ago.

For the year 2004, pro forma net income was $23.2 million, up 19 percent for the year 2003, and pro forma earnings per share was $1.57 per diluted share, an increase of 15 percent from last year.

Total assets ended the year at $2.2 billion, and increase of 25 percent from the prior year. Total loans were $1.4 billion at year end, a 26 percent increase from December 31st, 2003.

Since we have had continued growth in our core deposits, which comprise over 74 percent of our total deposits, we have been able to lower our overall cost of funds. Our core deposits at the end of 2004 were $1.4 billion, an increase of $284 million, or 26 percent compared with 2003. Total deposits increased 21 percent from December 2030, ending at $1.9 billion at the end of the year.

At the end of 2004, total securities were $643 million, an increase of $119 million, or 23 percent from the prior year. The securities portfolio is comprised mainly of mortgage-backed securities, CMOs, agency bullets and municipal obligations. The MBS and CMO portfolios have structures that will return the bulk of principal in two to four years. In a rising rate environment, they're at a minimal extension risk.

And now I'll turn the conference call back over to Melanie.

Thanks, Gary.

Another important highlight for the quarter was our loan growth. To review that, I'd like to introduce Mark Nelson, EVP and Chief Banking Officer. Mark has been in this new role since February of last year when we combined our retail and commercial service delivery channels under his leadership. Mark's responsibilities include our retail branch network, lending, cash management, international, CRA, marketing, retail investments and private banking. Mark?

Thank you, Melanie. As Melanie mentioned, we are pleased with the increase in our loan portfolio. Compared to 2003, our outstanding loans grew over $280 million, up 26 percent to $1.4 billion at the end of 2004. Our fourth quarter showed the most loan growth, increasing over $194 million from the end of third quarter 2004. Our commercial business category was particularly successful, increasing $91 million since the end of the year 2003. This increase in loans has been system wide. While the Bank of Astoria portfolio added some $100 million in loans, we generated the remainder through our loan production staff throughout our various market areas.

Last year our lenders stepped up their emphasis on calling on potential and current customers, and continued to provide the exceptional service Columbia is known for. These efforts have been rewarded with not only new relationships moving to Columbia, but also significant expansion of our existing relationships. Additionally, the improved economy has played a role in the increased loan demand.

In 2004, we also expanded our King County team. We recently added nine experienced bankers who were formerly with Washington Mutual, which discontinued its business banking operation. These bankers had many other opportunities, but chose to come to Columbia Bank and are making significant contributions to our loan portfolio.

While we have focused the last couple years on maximizing the potential of our branch network, and focusing on the strong base we have built in our current market area, we will always consider strategic new markets and branch locations. We will extend our footprint early this year by adding a branch at University Place. University Place is a thriving community just south of Tacoma, and will bring Columbia Bank's total network to 35 branches in five counties. Our retail network is strong, with several branches over $100 million in deposits. And yet there is plenty of room to grow. We believe we haven't reached capacity in any of our markets, and growth in market share continues as an objection.

Our merchant services area is another of our success stories. Merchant services continues to grow fee income which was $7.3 million for 2004, up 19 percent from the previous year. Their conversion of Bank of Astoria's merchant base was one of the most successful product introductions in the Astoria market, focusing both on efficiency and customer service.

As we were in 2003, Columbia Bank was number one in deposits among commercial banks in Pierce County, and in fact we reached almost 18 percent market share, as reported in 2004.

And now I'd like to turn it back to Melanie.

The other big story for Columbia last quarter and last year was the improvement in our credit quality. I'd like to introduce Andy McDonald, EVP and Chief Credit Officer, to outline these improvements. Andy has been with Columbia since last June, and is responsible for credit administration, special credits and compliance and loan operations. He has over 19 years of banking experience, including a variety of executive positions with U.S. Bank, West One Bank Washington, and Security Pacific Bank. Andy?

Thank you. At the risk of sounding repetitive, I am also pleased with the trends we are seeing in our loan portfolio. In addition to the healthy loan growth this past year, we experienced improving trends in almost all of our nonperforming asset classes. This is evidenced by the declines in non-accrual and OREO asset classes as detailed in our press release and discussed earlier.

In fact, as an organization, we are currently enjoying some of our strongest credit quality statistics as evidenced by our nonperforming loans to period end loans ratio of 0.62 percent, and our nonperforming assets to period end assets of 0.42 percent as of December 31st, 2004, respectively.

Furthermore, our allowance for loan losses to nonperforming loans was 235 percent year end 2004, and measured as a percentage of nonperforming assets was 218 percent.

In summary, the loan portfolio is behaving very well, and is reflecting the trends and statistics experienced by both banks industry-wide. So while I'm pleased with how it's behaving, we are not in a unique position, and as such we will continue to be diligent in our efforts in order to sustain these extremely strong credit statistics. As usual, we will have a more detailed discussion on credit quality in our 10-K.

Thanks, Andy.

In summary, Columbia had a good year. Our improved profitability reflects the success of our strategy to provide excellent service to our commercial and retail customers. The seamless integration of the Bank of Astoria as well as the significant expansion in our lending staff in King County were certainly highlights of the year, and demonstrate our commitment to the strategy of quality growth.

We will continue to leverage our strong base in both Washington and Oregon, while seeking other opportunities to enhance our organization.

We look forward to our annual meeting, which will be held at 1:00 on April 27th at the New Greater Tacoma Convention and Trade Center here in Tacoma, and I would invite any of you who are available to come.

And now we will open the call for questions. Just as a reminder, I have with me Chief Banking Officer Mark Nelson, CFO Gary Schminkey, and Chief Credit Officer Andy McDonald.

(OPERATOR INSTRUCTIONS.) Your first question comes from Jeff Lewis.

In the quarter, what kind of loan or deposit runoff, if any, did you see from the Astoria franchise?

We actually saw growth in both loans and deposits. We're very pleased.

Did you have a figure on that?

I don't have it with me, Jeff.

Okay. I guess turning to the charge-off total in the quarter, is there a percentage of that attributed to Astoria versus the COLB legacy franchise?

The charge-off was not associated with Astoria. It was housed in the traditional franchise.

Entirely?

Yes.

Yes.

And then in the year the tax rate sort of jumped around and was back at 30 percent. Is that something we should assume for '05?

Yeah, I think 30 percent is a good number going forward. That reflects some of our tax-exempt income that we have from our bank-owned life insurance, as well as our municipal portfolio, as well as some bonds that we have that are tax credits. So I think that would be a good run rate.

And then I guess lastly the reserve as a percentage of loans dropped significantly. Is this a level that you're comfortable with, or is there a range that we should look for?

You know, I would not characterize the decline in the reserve as any change in management's approach to managing it. It's simply a reflection of the amount of loan growth that we experienced in the fourth quarter combined with the charge-off that we took. And we have not really changed our attitude in terms of how we manage that reserve.

And the improved credit quality.

Thank you, great. That's it for me. Thanks.

Louis Feldman.

A couple of questions for you. Of the $94 million in loans, if you had loan originations of $194 million or $100 million of that theoretically came from Astoria, of the $94 million, can you break out what the WaMu team produced?

Yeah, our numbers as of the end of the fourth quarter, about $80 million.

They brought -- the WaMu team that you brought in produced $80 million of the $94 million in originations?

In the fourth quarter.

In the fourth quarter. Now, if I remember correctly, last quarter you talked about the fact that this team as a whole had had a total portfolio somewhere in the 200 to 250 range. Do you expect further gains going into the first quarter?

Well, Lou, I would rather answer that by saying our objective is to capture as much of that business as possible. You need to realize that every other bank in town is out there calling on these clients, and a portion of that portfolio is in fixed-rate long-term loans that have pre-payment penalties. And so our ability to capture all of that in the immediate first quarter of 2005 wouldn't be practical.

Well, I'm assuming something over the next three to five quarters. But then again I'm also assuming you're not necessarily going to want everything.

Right.

Right.

Absolutely. But we continue to focus our efforts on capturing as much of that business as potentially possible. And, also, there are a lot of other opportunities beyond that, and our folks are focused on that prospecting effort, not just with our WaMu team, but our whole King County group.

Melanie, can you talk about what your plans for Sherry (sp) and her team are at this point in time?

This is the classic case if it's not fix -- or if it's not broken don't fix it. They're doing a marvelous job. We don't have any changes anticipated. Sherry (sp) continues to be on board. It's just been a great marriage.

I guess the issue is, and this is one of the things that was discussed at the time, was you certainly give them the ability to have deeper pockets. Are they going to go after other credits that they weren't necessarily able to go after as $147 million institution?

Certainly. And we also have other products and services that they'll be able to offer their customers. We would expect the Bank of Astoria to continue to operate with the same aggressive as they've had before in terms of wanting to really develop relationships, expand relationships. And what we're going to do is to get them more tools and a higher lending limit.

Okay. And then one last one for Gary. Can you give us some guidance on your estimated SOX cost for '05?

Probably not at this time, Lou. There will be additional SOX costs for '05. It will be -- in my judgment it would be at a lesser level than what we incurred in the fourth quarter. The fourth quarter we incurred roughly, what?

Two hundred and fifty million.

Two hundred and fifty million?

Two hundred and fifty thousand.

Thousand, thank you.

I'm off by a comma.

Well, it feels that way, let me tell you. So it would be less than that, and then I think that would drop significantly after the second quarter as far as implementation is what we're talking about.

Do you have any guestimates on your cost on expensing options in Qs 3 and 4 at this point?

Well, I believe that for a publication that we will start that process hopefully on January 1. So we will be an early adopter, so we'll have some comparability over the four quarters. And at this point we're still working up those numbers to start the year.

Okay, thanks. I'll step back.

Joe Morford.

I was just curious if you could comment on kind of expectations in general for loan and deposit growth in '05.

Well, we continue to see the local market expanding here. And I would say that we would like to expect to see a continuation of the kind of growth patterns that we experienced in 2004.

So nothing you're quantifying at this point?

Yeah, we haven't done that publicly, Joe.

Okay, what about, Gary, if you could kind of update us on kind of asset recovery of the balance sheet at year-end, and the prospects of continued rate increases, what that could bode for the margin?

Well, we continue to be -- historically we have always been well matched at the 1-year range, but we are still very asset sensitive in the 0-6 month range, right around there. So as rates increase, revenue of course will increase as well. And in our opinion deposit costs with our high concentration of core deposits would lag that. So we believe that we're well positioned for rate increases.

I guess lastly you talked about some of the Sarb-Ox costs in the fourth quarter. Was there anything else in the numbers, or is this a good run rate to build off of beginning the first quarter?

Well, for the fourth quarter that number might be a little high, if you wanted to run that off into '05. We will have some additional costs as we complete our implementation in the first half of '05. Those numbers are yet to be determined, but we feel we have a good start on it as of the end of '04. So those numbers would be I believe from quarter to quarter would be less than the fourth quarter. Then they would taper off dramatically probably after the second quarter, and then we would be more into our routine costs for the SOX audit and the financial audits and so on.

Was there anything else beyond the Sarb-Ox stuff that was outsized or unusual in the quarter?

No, not really. I mean, we had with the addition of Astoria in the fourth quarter, that kind of moved some of our numbers up for the purchase method of course. But as far as any other type of expenses that really stood out, it was mainly the external cost of the SOX project and that kept people internal busy as well.

Okay, that's what it looks like. Thanks so much.

Ross Haberman.

Nice quarter.

Thank you.

Thank you.

Gary, a couple of quick numbers questions. How much did the Astoria acquisition add to the earnings in the fourth quarter in cents or dollars?

You know, that's a number that we haven't completed yet. We're still in the process of working on our 10-K, and we will have Astoria -- or, excuse me, Oregon and Washington as segments. and until those numbers are completed, I don't want to give you wrong information.

Okay. Are you realizing the savings which you thought you would? I know you're keeping them separate, but I don't know if there's any personnel loss at Astoria or in terms of trying to consolidate the back offices. Where do you stand with that now?

At this point we have had no personnel loss, and they've done a terrific job, and the staff is on board and doing terrifically. And over the course of the next probably year or two we will be talking about systems and that kind of thing. But in the meantime I think they're just doing an outstanding job, continuing to grow their market share, and we'd be happy with that, continue to do that and grow earnings.

So you're not going to consolidate the legal or accounting or data processing or anything like that for the time being?

Not in '05. And that will be something that the board and Melanie and myself will talk about as we move forward, and really it will be what makes sense for both of us.

When we actually priced the deal we did it with the understanding that cost savings was not the material issue. It was more enhancement of revenue by additional products and services.

Gary, a question for you, or it might be maybe a question for Andy I think. The net loan growth for the year at Astoria looked like about $180 million, if my math is right.

Correct.

Could you give us a breakdown on how that would break down by category? And where do you think you're going to see -- I think you had said earlier you expected to see similar growth -- you hope to see similar growth. What are the best or strongest categories you would expect to see it in from what you see today?

About $91 million, as we mentioned in our comments earlier, was in the commercial section of that growth.

That was WaMu?

Pardon?

That was the WaMu lenders which you mentioned?

No.

Well, no, that's across the board. The $91 million in commercial was from all of our groups combined, including the new King County group.

For the year.

Right.

Yeah, just C&I loans.

We actually saw really good loan growth in all of our markets.

Just a final question. How is Seattle doing per se, and do you have any new offices planned for '05?

Well, Seattle, I lump that into King County. And, again, one of our strongest markets there, particularly with our increased presence, we have our ongoing plans of taking a look at the market. We intend to consider opportunities in King County. We have nothing right at the moment as far as new offices in King County.

We do also look at alternative delivery channels as well. Obviously we can't paper Seattle very rapidly with additional branches, but with technology the way that it is today we're hoping to leverage technology even more rapidly than our branch expansion.

Your next question comes from C.R. Roberts.

About the new branch at University Place, where will it be, when will it open? And you've said you're not going to be opening up in King County -- you don't have plans right now. Are there any others in Pierce County you're looking at, for instance downtown Puyallup?

Go ahead.

We've been looking at a number of options. University Place is the one we have on the agenda. That's located at about 42nd and Bridgeport. It was an old Home Street Savings branch facility that we took over. And we expect that to be open some time in the second quarter this year.

C.R., when I said that we didn't have anything in the works for Seattle, that's today we continually look at all of the different market areas that we operate in to see where we need to fill in our footprint. And we always go out and try to find the banker to build the branch around. So there could be, you know, if we were to find just a filler banker in a certain market area, that could also drive us towards that market. We try to be a little bit flexible with our locations, but it does take several months for a branch typically to get open. So as of today the one new branch that we have is University Place.

(Operator Instructions.) Follow-up question from Louis Feldman.

Gary, can you talk about what impacted, since you didn't give us a deposit breakdown in the press release, can you talk about what the impacts were that caused the decline in your cost of liabilities for the quarter in terms of more detail on the deposit breakdown, and what your expectations are going forward?

Well, the decline in deposits cost has been our increases in core deposits that we've had, and mainly in -- our main increases have been no interest-bearing demand and money market accounts. And those continue to be very strong. So we really strive to seek for our transaction accounts, and we do very well with those as part of our C&I lending and so forth. So we haven't been strong on the CD side lately. We have a good liquidity, and that would be the cause of the decline or the slight decline in our deposit costs for the quarter.

And your anticipation going forward?

Our anticipation going forward is that at this point we don't seem to be having the need to be aggressive. We have good deposit growth, and as loan growth ramps up or other conditions warrant, there will be no need to be ahead of the curve in increasing deposit costs.

Will we see the breakdowns in the Q in the K?

In the K? Yes, you will.

Follow-up question from Ross Haberman.

Melanie, I was wondering if you're still looking for other banks to purchase. We were on the call earlier with Ray Davidson (sp). His opinion is that things are pretty well priced. I was wondering what's your finding and should we expect anything in '05, or you have to digest what you have for the time being?

I don't think that's a matter needing to digest, the Bank of Astoria transaction that just went so smoothly and continues to go so smoothly. We are always looking for opportunities to partner with other financial institutions that bring something to the table for us, as well as sharing our culture. But I would have to agree with Ray that it does appear that there is still a bit of a discrepancy between the price that the seller wants versus the price that the buyers, as you've seen all across the country. But we really always look for opportunities to team up with other great organizations like Bank of Astoria, that we're also very disciplined in how we do that.

Might any future acquisitions be a little closer in terms of proximity or fill-ins?

Yes, always a possibility, but I wouldn't rule out the latter either. We have always said that we want to be a very profitable, well-run, customer-oriented Pacific Northwest company, and we haven't changed that philosophy in our 11-year history.

And just one last finally related to that. Will any future acquisition be accreted the first year?

That's one of the things that we expect in any transaction. There would have to be a really compelling reason why we would not have that expectation.

You have a follow-up question from Louis Feldman.

Given the growth at the Port of Tacoma, what's your international department been looking like?

Well, we had a very successful year in 2004, a considerable increase in volume and revenue, and continued growth on the commercial lending side continues to bring in clients that have international needs. So very strong in 2004, and I would expect a repeat of that in 2005.

Who's your biggest competitor at this point in time?

Well, I would have to say it's probably some of the larger national banks, although most of them have moved their negotiation offices outside of the Puget Sound region. So we have one of the few that actually negotiates locally, and that gives us, we feel, a competitive edge in servicing our clients.

Because you will be facing another community bank in the near future in terms of Banner, because they announced they will be bringing in an international department in the Seattle marketplace within this next quarter. Do you feel that there's a better opportunity by being in Tacoma, or would you want to move these folks possibly closer to Seattle to cover the entire Sound?

We cover Seattle from our main offices here. Our people have always been doing a great job of partnering with our commercial officers and making calls. So I don't think where they're located will have any impact on our ability to give the highest quality service.

There are no further questions.

Okay. Well, thank you all very much for joining us this afternoon.

This concludes today fourth quarter and full-year 2004 earnings call. You may now disconnect.