Columbia Banking System Inc (COLB) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instruction) As a reminder, this conference is being recorded. I would like to now turn the call over to your host, Melanie Dressel, President and Chief Executive Officer of Columbia Banking System.

Thanks, Christina. Good afternoon everyone and thank you for joining us on today's call as we review our Third Quarter 2016 results which we released before the market opened this morning. And the release is available on our website, columbiabank.com. This was another good quarter for us as we continue to build on the solid results from the second quarter of this year. Our bankers achieved the highest loan production in our history with over $375 million in new originations. Along with this record production, our non-performing assets to period-end assets ratio improved to the lowest it's been in eight years. In addition, our deposits grew 10% from the same period last year. And we saw a modest expansion in our net interest margin.

As we move forward, our priorities continue to be growing quality loans, improving our operating leverage and effectively utilizing capital. Another priority has been to prepare for going over the $10 billion in assets mark. Since we've been focused on this for nearly three years now, we feel confident that we've made the appropriate infrastructure investments to ensure, we are well prepared for this eventuality. On the call with me today are Clint Stein, Columbia's Chief Financial Officer, who will begin our call by providing details of our earnings performance; Hadley Robbins, our Chief Operating Officer, who'll cover our production areas; and Andy McDonald, our Chief Credit Officer, who will review our credit quality information this afternoon.

I'll conclude by providing a brief discussion about the economy here in the Northwest and then we'll 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 Form 10-K filed with the SEC for the year 2015.

At this point, I'd like to turn the call over to Clint to talk about our financial performance.

Good afternoon, everyone. Earlier today, we reported earnings of $0.47 per diluted common share. Our reported net interest income of $85.6 million increased $3.4 million from the prior quarter. The linked-quarter change was primarily driven by an increase of $260 million in average earning assets. Non-interest income before the change in the FDIC loss sharing asset was $23.3 million in the current quarter, up from $22.9 million in the prior quarter. The increase was due mostly to higher investment securities gains, which were up [343,000] from the prior quarter. Driven by the increase in net interest income, our operating revenue grew per $3.6 million dollars to $104.3 million in the third quarter, up from $100.7 million in the prior quarter. Reported non-interest expense with $67.3 million for the current quarter, an increase of $3.5 million from the prior quarter. After removing the effect of OREO activity and FDIC claw-back liability expense, our non-interest expense run rate for the quarter was $67.5 million. This is a $3.9 million increase from $63.6 million on the same basis during the prior quarter. I thought it might be helpful to provide you with the breakout of the main drivers of the linked quarter increase in expense. Compensation and benefits were up $1.2 million driven by an increase of $1.1 million in incentive plan expense. Occupancy increased 567,000 due to 849,000 of expense recorded in conjunction with branch closures during the quarter. Advertising was up 950,000, we expensed 233,000 in the quarter for production of new commercials. The remaining amount is a result of seasonal broadcast expense.

Legal and professional services increased 487,000; 250,000 of the increase is related to our annual regulatory exam fee assessed by the State of Washington; the remaining increase is attributed to the seasonality I'd mentioned on previous calls. Excluding OREO activity and FDIC claw-back liability expense, our non-interest expense to average assets ratio of 2.84% hit the midpoint of the range that we have discussed in the past couple of quarters. Going forward, we still anticipate the 2.79% to 2.89% is a likely range for our expense ratio. The operating and interest margin increased 3 basis points to 4.03% during the quarter as a result of the extra day of accruals. The additional days in the quarter increase the margin by 4 basis points. Now, I'll turn the call over to Hadley to discuss our production results.

Thank you, Clint. Total deposits at September 30, 2016 were $8.06 billion, an increase of $385 million, $7.67 billion on June 30, 2016. On a year-to-date basis, total deposits have increased $619 million or about 8.3%. About $435 million of this increase was in non-interest bearing DDA. Core deposits were $7.81 billion, which represents 97% of total deposits. The average rate on interest-bearing deposits remained low at 8 basis points, which is the same as the prior quarter. The average revenue rate on total deposits remained unchanged at 4 basis points. Bonds were $6.26 billion at September 30, 2016 representing a net increase of about $153 million or 2.5% over the second quarter. Third quarter loan growth was largely driven by strong levels of new production, in the amount of $375 million. New production was predominantly on C&I loans of $221 million in commercial real estate and construction loans of $112 million. Term loans accounted for $263 million of total production, while new lines represented $112 million. The mix of new production was evenly balanced in terms of size, 35% new production was over $5 million, 28% was in the range of $1 million to $5 million and 37% was under $1 million. In terms of geography, 56% new production is generated at Washington, 26% in Oregon and 18% in Idaho and a few other states. The average tax adjusted coupon rate for the third quarter production was 3.86% which is below the year-to-date average for new production of 4.05%. The difference is largely related to a higher proportion of LIBOR index loans booked in the third quarter.

Following the pattern of new production, net loan growth in the third quarter was concentrated in the C&I and commercial real estate. C&I loans ended the third quarter at $2.63 billion, up about $111 million from the previous quarter. Industry segments with the highest loan growth in the third quarter include agriculture, forest and fishing, transportation and warehouse and professional services. Commercial real estate and construction loans ended the second quarter at $2.88 billion, up $52 million from the prior quarter. The mix of asset types was well diversified, property segments with the most growth where healthcare facilities on our occupied warehouses and education facilities. Going into the fourth quarter, pipeline volumes were consistent with prior periods.

However, we do have some headwinds for loan growth with pay out activity associated with the sale of businesses and income properties and lower levels of line utilization, particularly associated with agricultural borrowers beginning to apply crop proceeds to operating lines. The decline in line utilization is a seasonal pattern we've seen in prior years and it typically runs through the first quarter. That concludes my comments. I'll now turn the call over to Andy.

Thank you. For the quarter, we had a provision for loan losses of $1.8 million. As always, I'll like to give you a break out by provisions. The originated portfolio had a provision of $2.8 million. The discounted portfolios had a release of 525,000 and the purchase credit impaired portfolio had a release of 433,000. The provisions were driven by charge-offs and loan growth in the originated portfolio, net recoveries and continued contraction of the discounted portfolio, and a change in expected cash flows in the purchase credit impaired portfolio. For the quarter across all portfolios, loan growth was approximately $151 million. However, loan growth within the originated portfolio was $224 million, as the discounted in PCI portfolios contracted by $65 million and $9 million respectively.

We had net charge-offs of 906,000 for the quarter. The originated portfolio had net charge-offs of 1,433,000, while the discounted and PCI portfolios enjoyed net recoveries of 174,000 and 153,000 respectively. If you recall the last two quarters, the purchase credit impaired portfolio had net charge-offs of around $1.3 million per quarter. So it was the performance of the purchase credit impaired portfolio this last quarter that was responsible for the low level of net charge-offs, which obviously help lower the aggregate provision for loan losses as well. So as of June 30, 2016, our allowance to total loans was 1.12% compared to 1.13% as of June 30, 2016. The modest decrease in the provision of total loans continues to reflect the overall credit quality of our loan portfolio. This quality can be seen in the impaired-asset quality ratio, which remains extremely low at 13.16%. Our reserves cover non-performing loans by a margin of 3.3 times and while OREO balances is now down to $8.9 million. For the quarter, non-performing assets decreased $3.2 million, due to modest decreases in both nonperforming loans and OREO. As a result, NPAs were about $30 million or 32 basis points of period in assets. As we discussed previously, 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 $5.4 million or 9 basis points. In summary, we continue to be very pleased with how the portfolio is performing. So I'll turn the call over to Melanie.

Thanks, Andy. Well leading economic indicators in this part of the country are continuing to trend upward overall. We do see variations in the degree of economic growth, because of the diverse region that we operate in, but our larger metropolitan areas, driving the most growth. During the third quarter, Washington's unemployment rate improved to 5.6% and 20,000 new jobs were added. This was in spite of the state's labor force growing to 3.65 million in September, an increase of well over 21,000 people from the prior month; 70% or about 14,000 of these new jobs were added in the Puget Sound region. In fact, the Seattle area jobless rate hit an eight year low at 3.9% during September. Thanks to a booming tech economy with companies such as Amazon, Expedia, Facebook and Zillow rapidly expanding their workforces in the region.

For example, Amazon.com now employs over 25,000 people in Washington and it has reported 11,000 job openings in the Seattle, Bellevue area. And last week, Seattle Times reported that there are more construction cranes in Seattle than anywhere else in the country, twice as many as any other city, other than Los Angeles. The Northwest Seaport Alliance, the consolidated container operation of the Port of Seattle and the Port of Tacoma is the fourth largest container gateway in North America. Year-to-date, full imports are up 3% and full exports increased 12%. However, total container volumes are essentially flat due to the weakened international markets as well as domestic volumes being down as Alaska struggles with the decrease in oil and gas related activity due to low oil prices.

You may be aware that Hanjin Shipping filed for receivership on August 31 and the alliance is still working to determine the impact of the situation and how to keep cargo moving. Oregon has been outpacing the country and their job growth rates since 2013. The state posted rate of 3.5% for job growth in September, compared to the nationwide average of 1.7%. Incomes have also fared well with personal income growing by 1.3% during the last quarter or about $2.3 billion for Oregon workers. The unemployment rate in September was 5.5%.

The central Oregon City of Bend, Oregon where we have two branch locations was number one in the US for job growth last year at 6.6%. Idaho's unemployment rate held steady at 3.8% in September and the state ranked third in the nation for year-over-year job growth. Total jobs had a net gain of 21,500 or 3.2% with all sectors except for natural resources experiencing growth during the last year. The population and labor force of all three states continues to grow. Overall, we have an excellent job creation and strong GDP throughout the Northwest.

Now let me talk for just a minute about our dividend. Our financial performance and our optimism about our opportunities in the Northwest help to support our decision to continue to pay both the regular and the special cash dividend at the same level as last year. Our quarterly regular cash dividend of $0.20 per common share will be paid on November 23, 2016 to shareholders of record, as of the close of business on November 9, 2016. We will also pay a special cash dividend of $0.19 per common share, which will also be paid on November 23, to shareholders of record, as of the close of business on November 9. This is the 11th consecutive quarter that we are paid a special cash dividend. The regular dividend combined with the special dividend constitutes a payout ratio of 83% for the quarter and a dividend yield of 4.9%, based on the closing price for our stock on October 26.

So with that, this concludes our prepared comments. And as a reminder, Clint Stein, Hadley Robbins and Andy McDonald are with me to answer your questions. And now, Christina, we'll open the call for questions.

(Operator Instructions). Jeff Rulis - D.A. Davidson.

Hi, Jeff.

Hi, Melanie. Good afternoon. Question I guess the first one for Clint, who is just on the, still on expense run rate. We've got the info on the, I guess the ratio there. I guess is that equates to -- I thought you had stated a kind of a run rate in the $63 million to $65 million a quarter. Given that ratio, maybe that's a little low, maybe on a run rate range. What is that equate to?

You're correct, we in the prior quarter. I stated to $63 million to $65 million range for the run rate. It's probably more, more like $ 64 million to 66 million and there is variability, we saw that this quarter. We always talk about there is the potential for timing differences. And in the second quarter for example, our data processing expense was a little lower than what we would typically anticipate. We saw that kind of rebound in the third quarter. Advertising is something that has a bit of seasonality and lumpiness to it. So that's why, it's hard to just give you a specific number, but Melanie mentioned in her prepared remarks about the robust economy in the Northwest. And I'm sure you're well aware of what's going on in the Portland market as well. That's creating pressure in terms of just hiring and retaining talent. So we have expense pressure. I don't think that it's lessened any. And we continue to reinvest in our systems and in our franchise. And we've done a pretty good job, I think of trying to find efficiencies in our existing run rate, so that it's not just an incremental add to expense. If we look at our operating expense or take out noise from OREO, the FDIC claw-back liability in any acquisition expense, we look at the first nine months of 2015 and compare that to the first nine months of this year. And I think, expenses are up 1%. So we're very mindful of that, but there is pressure there. And we do continue to reinvest in technology and different things. And so I think that it's probably at $64 million to $66 million range for the immediate future.

Got it. Okay. And a question on the, on just the loan yields. Higher loan yields in this environment is pretty rare sequentially and how did you know Hadley referred to a higher percentage of LIBOR-based, but is it just mix that was put on in the quarter that led to that, are you seeing anything else in the market, which suggests that loan yields are firming up.

The coupon rate, as I mentioned, was [3.86%] and that was below really what we saw on the margin. And I think most of that is attributed to an extra day in this particular month that created that difference. Is that right, Clint.

And we had some higher yields in the PCI book in the quarter a bit, you know, pop that number up a little bit as well.

All Right. I guess, the environment is still has its pressure on loan yields in them.

That's right. I would say from a competitive perspective when you're in the marketplace, there is still is the pressure on coupon and that trend has been pretty consistent over the last two years and I haven't seen really that abate, the difference is getting less but it's still there.

And maybe one last one for Melanie, I missed very initial comment on the, something about the $10 billion mark and I had just a -- any preliminary thought on for 2017, borrowing, say M&A is not existent in 2017 is the idea that you probably try to manage below that mark for 2017, if you could or maybe that's not even a good way to think about it, anything on that $10 billion mark, you could add to it?

I think that we're going to go over $10 billion next year, you just look at organic growth and it's a reasonable assumption. We've talked a lot over the years about whether or not you manage under $10 billion and we've reached the conclusion that we're going to go over at some point in time, we've been preparing for three years, we feel as though we've feathered in a lot of the investment that needs to go into it. There is something that we can do about the impact of the Durbin Amendment, so that's going to be a reality. But we're just going to continue to grow and we felt comfortable in doing that.

Aaron Deer, Sandler O'Neill & Partners.

Hi and good afternoon, everybody. I guess, maybe you could just give some of your thoughts on what you've seen over the past years in terms of seasonality in the ag and other seasonal books and how we might expect to see that play out here in the first quarter, I'm sorry, in the fourth quarter with overall balances?

What we have seen and this is the general trajectory of activity, particularly online is that it starts to trend down in the fourth quarter and continues through the first quarter and then picks up in the second and third quarter. And in the third quarter, we have seen, it start to trend down slightly. But, I expect that to accelerate in the fourth quarter, taking ag as an example, and that's not the only segment that we have with the seasonal pattern, they harvest their crops and they create the cash and the cash then is applied to the operating lines and we see that going on, many on a cash basis and expensing things now or to year-end as well. And so it did impact our deposits side too but I don't anticipate the kinds of pressures there that I would see on our operating lines.

In terms of dollar balances. What's kind of the low-to-high peak that you would expect to see over the course of year, amongst those customers that recognizing that obviously the volume of those customers has been growing over time.

It has, and we've been successful in booking new clients. So it's kind of a mixed bag, but the swings are in the range of $50 million, and those are net loan balances. And I really, I don't have a feel that I'm confident in predicting what will happen in this particular year.

One thing, that we will share is that our bankers are not taking their foot off the accelerator. They are still committed to record quality loan production. So in some respects, that certainly helped us last year, even though we saw the seasonal decline online.

I guess, that actually kind of points to my next question, which is more kind of big picture. Melanie you touched on some of the many strengths in the Pacific Northwest economy right now, as well as the volume of cranes in the area. Given that level of construction, what are kind of your thoughts in terms of the -- when you look at absorption rates and new products coming online, what are your thoughts for the overall real-estate markets over the next 12-24 months?

Well, you know. It's really hard to see a crack in that part of the economy. Just because the job growth has been so strong. And I think just yesterday, a deal was announced with a multi-family project in Federal way, which is halfway between Seattle and Tacoma. That was the highest price per unit sale of any multi-family project in anybody's history. And that wasn't just a little bit over was I think $40,000 per unit higher. And so that's a little bit scary only from the standpoint that's so incredibly strong, but it gets the job growth, just in migration. And I think that the telling tale will be, if we see the number of jobs not meeting the expectations of all of the people that are moving into the area. And I'm just not saying where that would be right now.

Sure. Okay, well thank you very much, I appreciate you taking my questions.

Matthew Clark, Piper Jaffray.

Hi and good afternoon. I may have missed it, Hadley, but I think you mentioned the new coupon rate this quarter on production was 386 and I think last quarter was 420. And can you just give us the portfolio coupons as well.

I think it's 432.

And then line utilization, you may have mentioned it, I may have missed it this quarter, the percentage wise?

53.1%.

And then maybe Andy, I think a couple of quarters ago, we talked about charge-off kind of normalizing in that, 20 basis point to 25 basis point ranges, where they had been. I know you guys had higher recoveries and lower growth charge-off this quarter, so I would assume we kind of get back to that level but just curious what you're seeing.

Like Clint mentioned, before the uptick in the NIM was related to purchase credit and impaired portfolio to some degree. A lot of the charge-offs or I should say a lot of the recovery this quarter were actually in the purchase credit impaired portfolio. And about $1.8 million of that was really associated with pools of loans in the purchase credit impaired portfolio that received interest payments, but have no remaining discount. So the net charge-off number because of the crazy way do accounting for purchase credit impaired loans makes it look like we recovered a lot on loans that we charged off, but that's not really the case and that's why I try to highlight the difference between the purchase credit impaired portfolios in prior quarters, this quarter, so yes, I would anticipate that they would normalize back. The purchase credit impaired portfolio is hardest one to kind of predict. But the activity in the originated portfolio is the one you should focus on.

(Operator Instruction) Jackie Boland - KBW.

Hi, Jackie.

Hi, Melanie. I have question probably for Clint on occupancy. If I normalized for the branch closure expense that you highlighted in your prepared remarks that brings the balance down a bit lower than where we've seen in past quarters. Is that a good normalized number or are there some other factors that play in there.

It's a good baseline. I think if you look at, where we were last quarter, where we're at in the third quarter, backing out the branch closure expense. That's a good range of what I would expect going forward.

And then, I'm not sure if it was you, but somebody had mentioned just a difficulty with the strong economy and in some cases retention. And I know that a lot of the quarter-on-quarter change was incentive, but how much overall has retention cost kind of elevated compensation over the past year.

We don't have that number, readily available, Jackie.

I guess just your general spend. Is it a noticeable amount or is it just kind of the normal cost of doing business.

Well, for instance in some of the, even in the non-producer areas there are certain areas that the cost of employees is going up, just because there is specialty areas. And so it's kind of hard to indicate overall percent increase in that. We just really pride ourselves in negotiating really hard to get the best talent in the market. And that generally comes with maybe a slightly higher salary.

So, can we expect based on production and to the extent that you might advantageously hire a new person or two that the salary line would trend up over time. Maybe not at the same level that we've seen this year.

We're always recruiting and a lot of this is situational. And I would just say that it appears that the trend line is up for recruiting the high quality talent.

Okay, fair enough. And then just one last one kind of housekeeping. I know that 3Q always has seasonal strength and deposits, but was there anything in particular of notice this quarter since it was a little bit stronger than we've seen in past 3Q.

With regard to the production, I would say that we had some loans that actually closed this quarter that closed faster than we thought which elevated the level of overall production this quarter. But I would say that the loan officers have been as Melanie said very active in the marketplace, it continue to be and we had a number of successes, a few had been large on the loans. And then on the deposit side, what has been taking place there is that the deposits have been driven by and large by our own production. Those clients who brought to us very good deposit balances and we've been successful in acquiring deposit balances of customers that typically bring us more in a million dollars, which is really kind of the impetus behind the large increase.

And I think (inaudible) piece of it is that we're not transaction bankers, we've really worked to make sure that everybody's trying to gain the entire relationship, so you've got both sides of the balance sheet and it would probably be a little different if we were more transaction-oriented, you probably aren't going to get the same level of deposit growth.

Thanks for all the color guys, I appriecate it.

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

All right, well we appreciate you being with us the afternoon. The next time we talk too, I guess that it will be after the first of the year, so happy holidays to everyone and we will be back talking with you next quarter. Thank you.

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