Columbia Banking System Inc (COLB) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's first-quarter 2012 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Melanie Dressel, President and Chief Executive Officer of Columbia Banking System. Please go ahead.

Thank you, Rob. Good afternoon, everyone, and thank you for joining us on today's call to discuss our first-quarter results. And I hope that you've all had a chance to review our earnings release, which we issued yesterday just prior to our annual meeting and which is also available on our website, columbiabank.com.

With me on the call today are Gary Schminkey, our Chief Financial Officer, and Andy McDonald, our Chief Credit Officer. Mark Nelson, our Chief Operating Officer, will also be available for questions following our formal presentation.

Gary will begin our call by providing details of our earnings performance for the quarter and the year, including the financial benefits of our FDIC-assisted transactions, our capital position, net interest margin and core deposits. Andy will review our credit quality information, including trends in our loan mix, allowance for loan losses and our charge-offs. Then I will conclude by giving you our thoughts on the economy here in the Pacific Northwest and giving you a brief outline of our strategies as we move forward. We will then be happy to answer any questions you might have.

And, 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 the forward-looking statements, please refer to our securities filings and in particular our Form 10-K filed with the SEC for the year 2011.

Now I will turn the call over to Gary to talk about our financial performance.

Thanks, Melanie. Yesterday we announced first-quarter earnings of $8.9 million or $0.22 per diluted common share. This compares to $5.8 million for the same quarter of 2011 or $0.15 per diluted common share. While our earnings increased 54% over the same quarter last year, a few items made an impact to the results of the first quarter as compared to the fourth quarter of 2011.

We provided additional information related to OREO and OPPO in the financial statistics section of the earnings release. The information schedule provides a breakout of covered versus noncovered OREO and OPPO. The net cost of noncovered OREO in the first quarter was $2.7 million as compared to $923,000 in the fourth quarter, the net change in the quarter being about $1.8 million.

Covered OREO typically produces a gain on sales since these assets are recorded at fair value at the time of acquisition. Also impacting the first quarter was the cost of noncovered OPPO, increasing by $2.2 million due to a one-time write-down of a single asset. The OPPO charge is reported in non-interest -- other non-interest expense on the income statement. Andy will provide more detail on this a little later.

We provided a table in our earnings release showing the impact of certain accounting entries associated with our acquired loan portfolios. The net effect of our acquired loan accounting resulted in additional pretax income of about $5.1 million for the current quarter. This compares to additional pretax income from acquired loans of about $8.6 million for the quarter ended December 31, 2011.

When we last discussed the fourth-quarter results, we mentioned the Bank of Whitman discount amortization would materially decline in 2012 as the unamortized amount was about $11 million. The discount amortization recorded in the fourth quarter of 2011 was $9.2 million for this portfolio and declined to $3.1 million for the first quarter of 2012. If the incremental accretion from the discounted loan portfolio or Bank of Whitman is removed from the total, the net effect of the acquired loan accounting increased by about $2.6 million in the first quarter of 2012 as compared to the fourth quarter of 2011, including the provision for losses on covered loans.

The Bank of Whitman unamortized discount is about $8 million at the end of March. We had originally reported fourth-quarter operating margin at 4.68%, but during the first quarter, we discovered a component of additional accretion income that should not have been included in the operating net interest margin. So the fourth-quarter operating net interest margin should have been reported at 4.58%, rather than 4.68%.

Our tax equivalent net interest margin for the first quarter was 6.67%, up from 5.8% for the same quarter last year. The margin was positively impacted by 218 basis points as a result of the additional accretion of income related to our acquired loan portfolios. The net interest margin, excluding the additional accretion income, was 4.49% for the first quarter as compared to 4.58% for the fourth quarter of 2011. About half of the 9 basis point decline in the margin is related to change in interest reversals on non-accrual loans and one less day accrual in the first quarter of this year. The other half of the change is from rate compression.

Average interest earning asset yields decreased 49 basis points to 6.93% in the first quarter this year from 7.42% for the fourth quarter of last year. The decreased yield is due to an additional accretion income over the stated loan rate, offset by lower prevailing loan origination rates and investment yields. Also comparing the first quarter to the fourth quarter of last year, average interest-bearing liability costs have decreased 3 basis points to 38 basis points as core deposit costs have declined during the quarter to about 27 basis points.

Turning to non-interest income, after removing the effects of the change in the FDIC loss-sharing assets, non-interest income for the first-quarter 2012 showed an increase of $1.9 million or 20.2% due to increased volume and service charges on deposit accounts and merchant services fees when compared to the same period last year. The line item, other non-interest income, increased by $345,000 as compared to the first quarter of last year, primarily due to increases in mortgage banking fees of $194,000 and interest rates swap fees of $69,000.

Last quarter we recorded a $2.95 million impairment charge on investment securities related to a single municipal obligation, which went into default on December 1, 2011. Earlier this month, voters approved a regional tax measure to repay the bondholders. If all goes as planned, new bonds will be issued in about six to eight months, and existing bondholders will be paid.

After removing the impact of OREO and OPPO from non-interest expense, non-interest expense declined $605,000 or 1.41% for the first quarter as compared to the fourth quarter of 2011. Data processing costs were lower during the quarter, and we incurred minimal clawback expense.

At the end of the first quarter, core deposits were up $81.2 million from December 31 of last year. The increase in core deposits is coming from interest-bearing demand accounts, increasing $58.8 million during the quarter. Our ratio of core deposits to total deposits has increased from 92% at year-end 2011 to 93% at March 31 of this year. Our tangible common equity to tangible assets at March 31 was 13.2% as compared to 13.4% at December 31 of last year.

At this point I would like to turn over the call to Andy McDonald, our Chief Credit Officer. Andy?

Thanks, Gary. During the quarter, our noncovered loan portfolio increased approximately $23 million. Growth was centered in commercial business loans, which increased a little over $47 million. Growth in this segment was broad-based, led by agriculture and fishing, then healthcare, wholesalers and then manufacturing. Of course, agriculture and fishing benefited from seasonal drawdowns.

The growth in business loans was, however, offset by contraction in other portfolios, most notably our consumer portfolio which declined $13 million. Most of this decline was in our home equity portfolios, which contracted a little over $10 million as utilization rates fell between 4% and 5% during the quarter, so the commitments remained even but the usage declined.

The covered portfolio contacted as well, declining by over $51 million before discounts and loan loss provisioning. Most of this decline was due to the resolution of problem loans within these portfolios as we continue to address the issues associated with loans acquired through the FDIC-assisted transactions.

Looking at our nonperforming assets, we continue to see these decline, and they now represent about 1.84% of our noncovered assets as of March 31, 2012, down from 2.02% as of last quarter and 2.87% as of this time last year. As detailed in the press release, we had inflows of $14.7 million into the nonperforming category and had outflows of approximately $21.1 million.

Certainly the pace of resolution has slowed, but it is commensurate with the size of the NPA portfolio.

For the quarter we had a modest increase in nonperforming loans in both our commercial business and term commercial real estate portfolio. Within the term commercial real estate portfolio, the increase was primarily driven by two loans, a hotel property and a mixed used property. At this time, it appears the hotel property will end up as a TDR, while the mixed-use property is currently listed for sale.

Within the commercial business segment, we have three relationships which cause the negative migration -- a commercial contractor, a building and supply retailer, and a restaurant operator. The first two are indicative of the economic cycle, which has negatively affected construction activity. The latter has more to do with the industry than the economy.

For the most part, NPAs to loans and OREO and OPPO for the quarter was modestly improved, declining from 3.6% to 3.3%. As for each of the portfolio segments, they are as follows.

The one to four family perm pool saw another chance with NPAs accounting for 4.5% of that portfolio. The commercial perm pool was up a modest 0.6% from 2.8% to 3.4%. One to four family construction NPAs were down 6%, moving from 33.9% to 27.9%, and commercial construction was also down about 5.1%, moving from 19.2% to 14.1%.

The commercial business pool essentially was unchanged for the quarter with 1.9% of that portfolio being nonperforming, and the consumer portfolio declined 2.5% from 3.8% to 1.3%.

For the quarter the Company made a provision of $4.5 million, down slightly from the $4.75 million we put in last quarter. The provision was primarily driven by approximately $75 million in originated loan growth and, of course, the level of charge-offs during the quarter.

I want to apologize to those of you who read our press release yesterday, which incorrectly referenced only the originated loan growth. That was the primary driver last quarter, and the sentence was not updated appropriately, so again sorry for that confusion.

Net charge-offs for the quarter were $5.2 million. So, as you can see, our provisioning is more closely approximating our charge-offs, which again is consistent with the guidance we have given before and where we would expect to be at this point in the cycle.

For the quarter we lost approximately $910,000 on OREO when looking at it on a covered and uncovered basis combined. For the past several quarters, we have made or lost about $200,000 to $500,000 per quarter. So for this quarter, the loss was a bit higher than the range we had typically been in. Most of this has to do with a large charge down associated with a lot development project in Southwest Oregon. The market that this project is in is very depressed as evidenced by the fact that only five homes were sold in that market this past year, and there is currently a 68-month supply of lots in this area. So given these trends, it was not surprising that when we received a new appraisal, the value had declined significantly, necessitating a $1 million charge down.

I would characterize the overall performance of the loan portfolio as modestly improved compared to the fourth quarter last year. The disappointing part about the quarter was clearly the write-down in OPPO, which I would like to spend a moment discussing.

The asset is a note receivable secured by an apartment complex, which explains why it is OPPO not OREO in that we own the note, not the apartment complex. Unfortunately the owner of the apartment complex was not cooperative in allowing us access to the building or in allowing an appraiser to gain access to the building. So when we booked it into OPPO, we based the value on a qualified appraisal. It was the best information we had at the time.

After appropriate legal action, we were able to get a receiver appointed, which provided us access to the property, and we discovered significant deferred maintenance, as well as apartment units which had been stripped of appliances, countertops and fixtures, and in a few cases, the units had been stripped to the bare studs. This, of course, negatively impacted value, and we recognized that impact in the first quarter of this year based on an appraisal we received in March. This is a highly unusual situation, and we are currently carrying the asset on our books adjusted for customary selling costs at its "as is" value with no value given to repairing the units and getting them back online.

With that, I would like to turn over the discussion to Melanie Dressel.

Thanks, Andy. While we agree with most economists who are still predicting slow growth here in the Pacific Northwest, we have recently seen some very encouraging signs of improvement in our diversified region. Of course, major concerns remain. Unemployment rates, while declining, are still high, the housing sector is challenging, and the state and local governments continue to cut expenses and employment as revenues fall.

On the positive side, the outlook for Boeing, our region's largest private employer, is very good. They have a seven-year backlog of commercial orders to fill and are continuing to hire, and our contract with machinists union ensures that the 737 MAX will be built in Renton, Washington.

In fact, manufacturing has propelled Washington's job growth. The state's manufacturing sector added almost 15,000 jobs over the last 12 months ending in March, leading all other sectors. Boeing and other aerospace firms account for about half of those new jobs. The rest are in other types of manufacturing such as fabricated metal, machines, food products, electronics and industrial equipment, and these tend to be high-paying jobs that have a stronger economic impact.

We are also happy to have Costco, Microsoft, Amazon and REI headquartered here. They were all ranked by Consumer Reports among the top 10 companies with the best consumer policies and customer service.

Just this morning our local media announced that Joint Base Lewis-McChord is expected to form a new division headquarters, which would mean more soldiers and officers at the base. The base has doubled in size in the last decade, and it is one of the largest army basis in the US without a division headquarters.

The Pacific Northwest is also the top area in the country for international exports and imports. Last month the Grand Alliance shipping lines announced they selected Tacoma as its Northwest port-of-call, which could boost the port's container volume by 25% to 30% when they add additional high-paying jobs in our area.

The agricultural sector in our region is doing very well. For example, Oregon farmers posted a new record for agricultural sales in 2011 with farmers, ranchers and the fishing industry accounting for over $5 billion in sales last year.

Local economists believe the housing market is stabilizing, even though home prices have continued to fall. We have seen a significant number of sales of distressed properties through foreclosures and short sales, which has lowered the average home price.

In Washington state, unemployment rates are coming down gradually. The jobless rate was 8.3% in March, the same as the national rate, basically unchanged from February but down from 9.2% a year ago. The areas that saw the most growth were manufacturing, education and health services, aerospace and the transportation, warehousing and utilities sectors. Sectors with job losses included professional and business services, retail trade, hospitality and leisure, construction and government.

Oregon's economy has been growing more slowly, and its total number of jobs has remained relatively flat for almost a year. However, the jobless rate is improving and was 8.6% in March, down from 8.9% in December and 10% a year ago.

Interestingly, the Seattle--Tacoma--Bellevue region has seen the largest salary growth in the country since this time last year with a 3.2% overall salary growth compared to 1.4% nationwide.

It is also interesting to note that, despite our relatively high unemployment rates the past couple of years, the Northwest continues to be a draw for people moving here from other parts of the country, bringing new money and job skills.

In the past three years, while the region's population growth has slowed, it has still remained positive. In fact, the Census Bureau reports that more than half of everyone living in Washington and Oregon were born somewhere else.

While the slowness of the economic recovery has been challenging, we are continuing to make strides in our organic loan growth.

During the first quarter, new loan production was almost $130 million in the noncovered portfolio. This, however, was offset by declines in overall consumer and commercial line utilization. Our new business pipeline continued to grow at the end of the first quarter, an indication of the strength of our marketing efforts across business lines and throughout our footprint.

Obviously we were disappointed in the charge-offs related to OREO and OPPO this quarter. We don't, however, want to send a signal that credit quality is deteriorating. We would characterize the loan portfolio to be modestly improving quarter over quarter.

As Andy mentioned, we continued our methodical progress in resolving problem assets in both the covered and noncovered loan portfolios. As progress is made, we will be able to decrease our overall credit expenses. In turn, this should result in a lower efficiency rate.

Now that the last of the five conversions over the past two years related to our FDIC acquisitions has been successfully completed, we will turn our attention to ensuring that our cost of operations is fine-tuned. Additionally we will continue our efforts to ensure that all of our products and services are introduced to our new areas in our footprint.

We are already seeing success in this area, particularly in merchant processing, Visa cards and cash management products.

You can see from our dividend payout that we do not see the need to accumulate capital at this time. We have seen a little bit of an uptick in M&A activity, and we are continually considering acquisition opportunities and other ways to effectively manage our capital.

With that, this concludes our prepared comments this afternoon. As a reminder, Gary Schminkey, our Chief Financial Officer; Andy McDonald, our Chief Credit Officer; and Mark Nelson, our Chief Operating Officer, are with me to answer your questions. And now, Rob, would you open the call for questions?

(Operator Instructions). Joe Morford, RBC Capital Markets.

The first question was for Gary on the margin. You talked about half of the decline coming from the compression in loan yields. Maybe you can just talk about the outlook for the margin going forward and maybe the pricing environment for loans in general.

Well, I think we still have the -- competition is still strong on the lending side, and Mark may add some to this as well. But the loans that we booked in the fourth quarter certainly influence our first-quarter results. We calculated about 4 basis points plus or minus on the margin compression for loans and securities yields. We have roughly, I would say, $150 million plus coming in from securities portfolio this year that will be repriced downward. And so I'm still predicting that we would be in the 4.25% to 4.50% range for the year. If this trend would continue, I think it would not be unreasonable to expect that same trend to continue into the 4 to 6 basis points a quarter just as an estimate.

That is helpful. I guess the other question is for Melanie on the acquisition front, you say activity is maybe ticking up a little. We have also seen a handful of banks announce yields for specialty finance companies, leasing or apps-based lenders. Is that of interest to you as well at this point?

Yes. I would say that we are very open-minded about looking at other lines of business, but I would feel that the M&A activity in the banking world is probably where we would focus the majority of our attention.

Jeff Rulis, D.A. Davidson.

Melanie, just a question on your wrap-up comments regarding the conversions are all complete and kind of a focus on expense control. If you could hazard a guess or a statement on non-interest expense, what is a good core figure? I mean if you were to strip out the write-downs and real estate owned costs, is there a base where you are at today you are comfortable with an expense level on a quarterly basis, say, in the $41 million range?

We really have not disclosed a number, Jeff, and I don't mean to be difficult about that. But because we have done five FDIC acquisitions, it is difficult to project when we will be through dealing with all of those loans and when we might see more normalized levels or what the new normal would be in credit expense. And it is hard to break out all of our credit expenses just related to FDIC acquisitions because we have folks that are working on both the covered and the noncovered portfolios.

How about just maybe a core efficiency ratio? I mean this could be a little broader term -- quarters out, but, as the dust settles, how does it feel in terms of an efficiency ratio what the Company could do?

Well, our goal is 55% over time, and we have been talking about that for quite a while. And we have done seven acquisitions over the last five years, which has slowed our progress down with that. We just plan to walk it down.

On the efficiency ratio, we have acquired a new footprint we really need to grow into. And maybe it makes sense to define how we calculate the efficiency ratio because there's are some differences in what you might see on published reports.

When we look at it, we reported efficiency ratio of what about slightly over 70%. We do not include any gains or losses. We don't include accretion -- any of the acquisition accounting numbers for the accretion or indemnification assets and certainly don't include the OREO/OPPO expenses in that calculation. So we try to get to just a base operating number that we can manage from that is not subject to all the variations.

And if we were to take that number and gradually walk that down this year, certainly it would not be unreasonable to think it would be somewhere in the 55% to 68% range potentially if that helps.

No, that does. I appreciate just the attempt to disclose some of that. And then maybe, Andy, just a quick one on the -- you made a comment on the correlation on the provision versus net charge-offs. Is it safe to assume this year that net charge-offs would exceed -- continue to exceed the provision for the noncovered loans?

No, I think they will more closely align to each other, which is kind of what has been happening. As I talked about before, we were able to release a lot last year, but that trend is going to continue to narrow. I could actually see the provision being greater than charge-offs, but that would be more of a function of the loan growth. So we are getting down to a provision level that we would want to run at given this current economic environment. So I would not expect us to release a lot.

Brian Zabora, Stifel Nicolaus.

A question on the Bank of Whitman portfolio. Do you have what the balance is as of first quarter versus fourth quarter?

The balance of the portfolio?

Yes, what loans -- what the loan balance is, can you break that out?

Andy is calculating that, Brian.

About $151 million this quarter, and my recollection here it was about $160 million, $165 million last quarter.

Great. And then classified loans, do you have either directionally or how much that changed this quarter?

Our watch list continued to decline in the quarter, and it has been declining now for, I don't know, about seven or eight quarters. I did not calculate a percentage change.

(Operator Instructions). Aaron Deer, Sandler O'Neill & Partners.

A question and pardon me, I had to jump on the call a little late, so I might have missed this. But, Mark, can you give an update in terms of what the loan pipeline looks like and what your outlook is for the next couple of quarters anyway?

Yes, as we talked about the last time, we have really got our folks targeted on close conversion, reaching out to our client base and our prospect base. I recently traveled throughout the whole footprint. I think we have got some great moments on going. In spite of pretty considerable loan growth, our pipelines are still building, and we are feeling pretty good about the quality of loans in there. Clearly middle-market, C&I and commercial real estate are the largest numbers, but our professional lending and wealth management area are generating some pretty good numbers. And we are starting to see a bit of turnaround, I think, in the small business side, certainly from our existing client base as we reach out to them.

So I guess, in summary, our pipelines are building, and it is pretty much driven by -- mostly by the activities of our folks getting really focused on our outreach.

Okay. It sounds like the pipeline relative to where it stood at year-end is up?

Yes, in spite of the fact that we closed a lot of that stuff that was in the pipeline during first quarter.

Right. (multiple speakers)

I was just going to say that last year we made about $0.5 billion in new loans, and this quarter it was $130 million. So we are still feeling good about the pipeline and new production.

That is great. And then just one last one. What was your accruing restructured loan total at March 31?

I will tell you in just a minute.

And that is it for me, and then I will step back.

While Gary is looking that up, in response to Brian's question, our watchlist declined 10.4% during the quarter.

The accruing restructured loans at the end of March were $6.739 million. Oh, I'm sorry. I was looking at the wrong side. At the end of March of 2012, $8.349 million, I apologize.

There are no further questions at this time. I will turn the call back over to to your presenters.

Okay. Well, thanks very much for joining us this afternoon, and we will talk to you next quarter.

This concludes today's conference call. You may now disconnect.