Columbia Banking System, Inc.
Q1 2015 Earnings Call Transcript

Published: 23 Apr 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System’s First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session. Instructions will be given at that time [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.

[Melanie Dressel:]

Thank you, Tanya. Good afternoon, everyone, and thank you for joining us on today's call to discuss our first quarter 2015 results which we released yesterday just prior to our annual meeting. The release is available on our Web site, columbiabank.com. As we outlined in our earnings release, we were pleased with our performance for the quarter, particularly since we had $3 million of acquisition related expenses during the period. For the fifth consecutive quarter, our bankers throughout our market area have achieved over $200 million in new loan originations. Additionally, we increased our revenue from last quarter and we had solid core deposit growth and our operating net interest margin continues to show great resiliency. Clint Stein, Columbia’s Chief Financial Officer is on the call with me today. He’ll begin our call by providing details for our earnings performance. Andy McDonald, our Chief Credit Officer, will review our credit quality information. And Hadley Robbins, our Chief Operating Officer, will be covering our production areas this afternoon. I’ll then conclude by giving you our thoughts on the Pacific Northwest economy, including Washington, Oregon and Idaho, and a brief outline of our priorities as we move forward in 2015 and beyond. We will then be happy to answer your questions. 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. For a full discussion of 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 2014. At this point, I'll turn the call over to Clint to talk about our financial performance.

[Clint Stein:]

Thank you, Melanie. We reported first quarter earnings of $24.4 million or $0.42 per diluted common share. However, there was some noise in the quarter which influenced our results that I will take a moment to highlight for you. Our reported earnings per share were negatively impacted by just over $0.03 due to $3 million in pretax acquisition related expense. The accounting impact of our acquired FDIC loan portfolios was a slight benefit, increasing pretax income $82,000 for the quarter. Other items that had a positive impact on pretax income was a net benefit from OREO of $1.2 million and securities gains of $721,000. The combination of these items had a favorable impact on EPS of just over $0.02. To summarize, we reported $0.42 including $0.03 of headwind from acquisition expense that was partially offset by $0.02 of OREO in securities gains. Our reported net interest income increased $1.6 million over the prior quarter to $80.4 million. However, with the mid fourth quarter acquisition of Intermountain linked quarter comparisons are difficult. Non-interest income before the change in FDIC loss sharing asset was $22.6 million in the current quarter, up from $20.5 million in the prior quarter. The $2.1 million increase was primarily due to one additional month of Intermountain activity, the previously mentioned securities gains and the increase in gain on loan sales mentioned in the earnings release. Total non-interest expense was $66.7 million for the current quarter, up $2.6 million from the fourth quarter. The increase was due to the inclusion of Intermountain for the full quarter. After taking into consideration acquisition related expenses and the net benefit of OREO, our core non-interest expense run rate for the quarter was $65 million, up from $60.7 million on the same basis during the fourth quarter. $2.6 million of the increase related to the additional months of Intermountain in our reported results. The remaining $1.7 million stemmed primarily from seasonal increases in compensation and benefits. The previously mentioned $3 million of acquisition related expense is broken out as follows

[Hadley Robbins:]

Thank you, Clint. Total deposits at March 31, 2015 were 7.07 billion, an increase of about 150 million or 2% from 6.92 billion at December 31, 2014. Core deposits were 6.77 billion representing 96% of total deposits. The average rate on interest bearing deposits remained low as Clint mentioned at 7 basis points as compared to 8 basis points in the previous quarter. Loans were 5.45 billion at March 31, 2015, an increase of about 6 million over year end 2014. New loan production during the first quarter was 2.17 million slightly higher than new production in the first quarter of 2014. Lift created by new production was not sufficient to offset prepayment activity and lower levels of line activity. Overall, line utilization dropped from 52.9% at year end 2014 to 50.9% at the end of the first quarter 2015. Concurrent with lower line utilization outstanding line balances dropped about 34 million. Industry segments experiencing the largest decline, in line balance with the real estate and agriculture which is consistent with seasonal borrowing activity. The mix of new loan production during the quarter was predominantly centered in commercial business and commercial real-estate loans. Term loans accounted for roughly 142 million of total new production and new lines represented about 75 million. New production was fairly granular in terms of size, 6% of new production was over 5 million, 38% was in the range of 1 million to 5 million and 56% was under 1 million. In terms of geography 56% of new production was generated in Washington, 40% in Oregon and 4% in Idaho. Sub-segments of the loan portfolio that provided positive contributions to net loan growth in the first quarter were commercial business and commercial real estate. Commercial business loans ended the first quarter at 2.1 billion up about 20 million. Industry segments where loan increased the most include finance and insurance, manufacturing and healthcare. Likewise commercial real-estate loans ended the first quarter at 2.5 billion up 9 million. The commercial real-estate asset type with the largest increase was a term investor office. Asset categories with the most significant declines were healthcare, recreational properties and multifamily. The declines in these categories were largely the result of payout triggered by investor property sales. The sub-segment of the loan portfolio that experienced the largest decline in outstanding loans during the quarter was commercial and multifamily construction. Commercial and multifamily construction loans ended the quarter at 119 million down about 15 million. The decline in balances in this portfolio are largely a result of successfully completed or stabilized properties moving to longer term funding solutions that typically are provided by the bank or by the secondary market. During the first quarter we had a number of loans moved to the secondary market through permanent financing at rates and terms we’re unwilling to match. The loan interest rate environment coupled with aggressive competition for running assets has created pressure on pricing that is pervasive across all of our markets. As a result the tax adjusted average coupon rate for the Bank’s loan portfolio has trended downward. During 2014 the average coupon rates steadily declined ending the year at 4.54%. As of March 31, 2015 the downward trend continued with the average coupon rates slipping to 4.50%. However, it’s worth noting that the average coupon rate for new production for the quarter was 4.39% versus 4.19% in the fourth quarter of 2014. The competitive environment does make predicting outcomes for net loan growth difficult to estimate with confidence and precision, however, expect more meaningful levels of net loan growth in the second quarter. Deal flow is active which should lead to higher levels of new production. We should also see seasonal [usage] on lines create positive growth. That concludes my comments. I’ll now turn the call over to Andy.

[Andy McDonald:]

Thanks, Hadley. For the quarter the company had a provision of 1.2 million driven by the purchase credit impaired portfolio which required a provision of 2.6 million. This of course was driven by a decrease in the present value of expected future cash flows associated with this portfolio. Net charge offs in the purchase credit impaired portfolio were 2.4 million for the quarter. Offsetting the provision for purchase credit impaired loans was a release in provision for our origination and discounted portfolios of 1.4 million. The originated and discounted portfolios enjoyed net recoveries for the period of 1.9 million. So in total we had net charge offs of just 544,000 for all of our loans which equates to roughly 4 basis points on an annualized basis for the quarter. As of March 31st our allowance to total loans was about 1.29% or even with the level at December 31, 2014. Our allowance to non-performing loans was essentially unchanged in 221% when compared to year end 2014 and up from 194% as of the end of the March 31, 2014. As before I would like to remind folks we have approximately 45 million in loan discounts associated with the Bank of Whitman, West Coast and Intermountain portfolios which could also provide the shield for loan losses. For the quarter non performing assets were essentially unchanged as we replaced what we resolved. Nevertheless they remain modest at 65 basis points of total assets. Most of the improvement in credit quality for the quarter was in our reduction in classified loans, which declined from 133 million at year-end December 31st or 3% of total loans to 115 million as of March 31st or 2.9%. This compares to 189 million or 3.81% as of March 31, 2014. So year-over-year we have enjoyed about 40% reduction in classified loans while at the same time net charge-offs have only run around 12 basis points. As of the end of the quarter, we also had approximately 8.5 million in recorded investment in TDR, of which about 300,000 is included in the NPA category, leaving us with 8.2 million of performing TDR. Past-due loans at quarter end were 39 basis points compared to last quarter when they were 48. With that I’ll turn the call over to Melanie.

[Melanie Dressel:]

Thanks, Andy. Although we have a lot of economic diversity as financial results of the large geographic area represented by Washington, Oregon and Idaho, most of the indicators are showing that the Northwest has seen an expansion mode. This is particularly the case in our large metropolitan areas. They sense some consumer confidence in rising. We regularly survey our business customers throughout our market area to better understanding economic condition and as to better understand challenges and opportunities for our business customers. The most recent survey in January showed the confidence in the future of their businesses was at an all time high in all industries, and that the owners were feeling much more optimistic about the economy. However, the interesting thing while is that the businesses are still struggling with government regulation and taxes and over half say that they are not yet ready to invest in capital expenditures. Unemployment rates in our region while somewhat uneven depending on the state and the county reflect an overall improvement. Washington increased jobs by over a 100,000 from March 2014 to March 2015 was about 90% of those jobs in the private sector. The state's unemployment rate for March was 5.9% down from 6.3% in February. In the Seattle metropolitan area unemployment was just 4.5%. With people continuing to move to Western Washington the housing market is becoming more competitive resulting in low inventories and higher prices. It’s interesting that nearly all of the large U.S. counties with high population growth rates are located in the Sun Belt. Our perceived cold, wet weather is isn't hindering King county's population growth at all, which was 7.36% since 2010, which is the second highest in the country. Oregon’s unemployment rate has landed below the national benchmark for the first time in almost 20 years. The March rate hit 5.4% down from 5.8% in February compared to the national unemployment rate of 5.5%. A year ago Oregon imposed its 7.1% unemployment rate. Oregon jobs grew by over 56,000 positions or about 3.3% during the past year. The fastest growing sectors are those encompassing white color firms and healthcare providers and are primarily clustered in the Portland Oregon, Vancouver Washington metro areas. Oregon’s 2014 population growth ranked 13th fastest in the nation and while there has been a rebounding construction in particular in the Portland area and net housing hasn’t yet been added to keep up with the population growth. Like much of Western Washington, this means the persistently competitive market for homes isn’t likely to ease anytime soon. February was the 67th month that Idaho jobless rate has been below the national average. The unemployment rate was at a seven year low of 3.8% with Boise posting very low rate of 2.4%. Idaho’s labor force expanded for the third straight month, almost 5,000 workers were attracted to the state. Total employment was more than 75,000 higher than the bottom of the recession in mid 2009. The strongest parts of the economy in Idaho are manufacturing, healthcare, tourism, agriculture and food and beverage processing. The top manufacturing product in the state is computers, and computer components. Healthcare has seen an increase in the revenue of 46% in the past 10 years, then Idaho ranks as the second in the nation for growth in this sector. Tourism brings in almost $3.5 billion annually. So let’s talk a little bit about going forward. A priority is to continue our business development and sales management efforts to increase market share in every market we serve. We will continue to build on our success in growing loans and we’ll focus on our outstanding core deposits as we develop new and existing customer relationships that will help us maintain our stable net interest margin. And of course we want to successfully complete the integration of Intermountain, including the core operating conversion during the second quarter. Effective deployment of capital is very important. We are operating a higher level of capital at a higher level of capital than some may perceive as necessary. But we do feel comfortable that we have the opportunity to deploy our capital through lending, considering other acquisitions as well as utilizing dividends to manage capital levels. Controlling expenses is also a priority. As Clint mentioned as the Intermountain acquisition is fully integrated we should reduce our core expenses to total assets down to about 2.9%. We’ve grown considerably over the past several years, but we are not growing simply for growth sake. Having a larger base over which we can spread the rising cost to compliance and technology certainly has value for our shareholders. However, it would be short sighted of us if this is the only reason to do acquisitions. We continue to feel that we have the absolute best opportunity to be the Pacific Northwest community bank. We’re very gratified that we were recently named the top place to work in the large employer category by the Pierce County Business Examiner. We firmly believe we can’t be a great place to bank unless we are at great place to work. We’re also pleased to be ranked the 14th best performing regional bank of the nation for 2014 by SNL Financial. SNL’s metrics use six core financial metrics that focus on profitability, asset quality and growth for the year. Yesterday we also announced an increase regular cash dividend of $0.18 and a special cash dividend of $0.16. Both will be paid on May 20th to shareholders of record as of May 6, 2015. This is the fifth consecutive quarter that we have paid a special cash dividend. Both dividends totaling $0.34 constitute at payout ratio of 81% for the quarter and a dividend yield of 4.6% based on our closing price yesterday. And with that, this concludes our prepared comments this afternoon. As a reminder, Clint Stein, Andy McDonald and Hadley Robbins are with me to answer your questions. And now Tanya would you please open it up for questions.

[Operator:]

[Operator Instructions] Our first question comes from Joe Morford from RBC Capital Markets. Your line is open.

[Joe Morford:]

I guess first question was just on the loan growth, your comments suggest that some of it can be -- the slower growth this quarter can be attributed to lower line utilizations and increased prepayments. I guess I was trying to get a better feel for how much of that can be just tracked up to normal seasonal trends and how much is reflective of say the lack of willingness to invest which you’ve referenced and/or more aggressive competitive environment?

[Client Stein:]

I think that if you think about loan growth for the first quarter, the seasonal component is pretty strong with the timing of activity under active construction. It varies a bit but it played heavily into the first quarter results, also I think the fourth quarter was our biggest production in any quarter and that in order to achieve that I believe that it impacted the build out of the pipelines as we were closing out some of the loans in the fourth quarter, but that would be a small influence. I think also the home equity portfolio was declined a bit as you can see and some of that relates to the activity in the marketplace where people are finding longer term rates for their mortgages that are attractive and continuing to refinance to achieve that and it impacts some of the issues. So I would say that most of the activity relates to seasonal components and I think that in the second quarter we'll see more of the traditional seasonal pattern of usage take place and get lift and we should have higher levels of production as well.

[Joe Morford:]

Okay, perfect. The other question I guess was just, if we could just get a general update on the integration of the Intermountain operations, just kind of the timing in the systems converge, and you’re comfort with the cost savings, targets the timing we may see those come through between the second and third quarters?

[Hadley Robbins:]

This is Hadley. I can speak to the integration activities and Clint possibly the other cost savings. On the integration activities, our project plan is on track. We’ve tested systems, completed mapping and feel very comfortable that we’ll be able to convert systems successfully and that scheduled for May and I feel very confident it will be a smooth conversion.

[Clint Stein:]

With respect to the timing of cost saves, we have about 3 million to 3.5 million that we’ve realized at a certain point from November 1st through March 31st. We didn’t get the full benefit of all of that obviously during the first quarter because it builds through the quarter, that leaves us about $5 million of cost saves to go, the majority of those will be realized 30 to 60 days post conversion. We get everybody on the same operating system, that will decrease our data processing expense and some of those things. So we’re still tracking to the model that we discussed in September in terms of anticipated cost saves and synergies, we're on track for that. As it relates to acquisition expense, right now I think that we’re going to come in better than what we had modeled and expected relative to the $18 million of deal expense. I’m not prepared to give you a number of how much better, I will when we’re completely done with the integration, but I do think that that will be a positive pick up. The second quarter we should see a lot of activity in acquisition related expense with be systems conversions. However the timing of that relative to the point that we're at in the second quarter, we could see some spillover into the third quarter as well with that. So right now expectation is we’re going to have probably more acquisition related expense in what we experienced in the first quarter in the coming quarter and then it should start to taper off in the third quarter and I would expect that the fourth quarter will be pretty clean for us in terms of -- shouldn’t have a lot of the noise that we’re currently experiencing.

[Joe Morford:]

Okay, that’s very helpful. Thanks so much.

[Melanie Dressel:]

Thanks Joe.

[Operator:]

Your next question comes from Jeff Rulis from D.A. Davidson. Your line is open.

[Melanie Dressel:]

Hi Jeff.

[Jeffrey Rulis:]

Thanks, good afternoon. So Clint, not to get too granular, you mentioned 65 million in core, you've also give us the ratio. If we back into the comments about 5 million, I should say that's annualized to go -- I guess what is that number on a quarterly basis settle in that or layered on with potential growth initiatives as well? I guess as you exit the year what would that figure be on a quarterly non-interest expense level?

[Clint Stein:]

The 5 million is an annualized number. So we’re looking at 1.250 million on a quarterly basis. All things being equal, apples-to-apples where we’re at today and you can extrapolate that that's somewhere between 63.5 million and 64 million for a run rate. Since we don’t give guidance I can’t necessarily give you the rest of the answer in terms of what the run rate might be and that’s why we give you the expense to asset ratio because everybody models growth a little differently and in that way for your model you can right size it and where we end up at year end relative to what our internal plans are, we would be hope to be somewhere around 2.9% on a run rate. Now there's variables that come into play relative to what we do in terms of building out our footprint, we’ve talked in the past about Boise, if we had the opportunity to pick some teams reinvest in the business going forward. So, it’s difficult to just say absolutely with certainty it's going to be 63.75 million come fourth quarter, but when we get there we should be able to see where the run rate is and if it's different than that number then we’ll know it was from some of the factors that I mentioned and we’ll be able to talk you through that.

[Jeffrey Rulis:]

That’s helpful, I was trying to equate the two and that’s more than enough, so thanks. I guess maybe for Melanie, maybe a broader question, just interested in some of the port activity and maybe some of the closure impact if any or that was sort of near term blip? And secondarily I guess the strength of the dollar and potential or already seeing any impact in trade volume? Just maybe an update on what you’re seeing out of the port businesses or at the port?

[Melanie Dressel:]

Trade volumes aren’t quite back to what would be considered normally, even without the value of the dollar figured into it and it’s just because there was such a huge backlog. What we’re hearing from the port is that they are not seeing a lot of pull back and most of the products coming in and out of the port are necessities. But I think that there is still some risk involved just because some of the other ports like in Texas have really benefited just by virtue of some of the shipping companies gave them a price, I think they were satisfied with them.

[Operator:]

Your next question is from Jacquie Chimera from KBW. Your line is open.

[Jacquie Chimera:]

The deposit moves that happened in the quarter, just the shifts between accounts was that a change in how they were accounted for when they came over or was that moving Intermountain onto your pricing systems?

[Client Stein:]

I think that some of it was, we rolled out a new product set in anticipation of Intermountain, but also just looking at our existing product set and Hadley probably has some more specifics on that. But I believe that’s probably what you’re picking up is there some migration related to what we did with our product offerings and how we mapped our existing products into some new ones that were announced.

[Hadley Robbins:]

That's very true. We did change our deposit product configurations and the shifts that you see particularly in the demand and interest bearing demand categories related to that.

[Jacquie Chimera:]

So were they most likely just checking accounts or other accounts that had a very low interest rate on them, so they probably won’t really notice that the accounts aren’t paying interest anymore?

[Hadley Robbins:]

What we were trying to do is as you know we’ve had a number of acquisitions over time, we had a number of legacy products. And that we wanted to get to a common product set that would reduce the complexity of what we offered and we also wanted to encourage deeper penetration of our product mix with our deposit clients and structured it accordingly. And the shifts that you see again are really an outcome of that effort. So we don’t expect the cost of deposits to shift materially as a result of that.

[Jacquie Chimera:]

Okay, sounds good. And then one for you Melanie, so as I look back over the last couple quarters the special dividend attached to the regular dividend has been fairly consistent even despite having closed a transaction. Are there any specific trigger points or anything that come up in your discussions as to what might end that or is it something that we can look to see ongoing in future quarters as well?

[Melanie Dressel:]

Well, I think that it’s important to know that it's a topic of great consideration each quarter and that it really depends on a lot of different factors some of which are not as transparent and for instance if there is an opportunity to be doing an acquisition that would certainly play into our thinking. And so I would say that if you are looking at it today that I think this was a good quarter we paid particular attention to the regular dividend and really wanted to make sure that it is very sustainable and that’s probably as much guidance as I can give you on that.

[Jacquie Chimera:]

Okay, fair enough. Thank you I’ll step back now.

[Melanie Dressel:]

Thank you, Jacquie.

[Operator:]

[Operator Instructions] Our next question comes from Aaron Deer from Sandler O'Neill & Partners. Your line is open.

[Aaron Deer:]

Hi. Good afternoon everyone.

[Melanie Dressel:]

Hi Aaron.

[Aaron Deer:]

I guess most of my questions have been answered, I've got one for Hadley, I was hoping just maybe to give a little bit more color behind your comments regarding the pay downs and some of the competition that you’re facing from other banks. Can you talk about what you’re seeing in terms of pricing or what's causing you to step back and letting some of the business go?

[Hadley Robbins:]

Starting with the commercial construction category, I mentioned that we had a decline of 15 million there. Most of the opportunities that we have for stabilized properties, we certainly try to retain. In this case the secondary market particularly the live companies were willing to offer [four sub four] 10 year money, more liberal terms as related to the amount of money that they were prepared to advanced in also non-recourse. So that puts us pretty much outside the range of what we would like to see in our portfolio. As it relates to other opportunities that let say, we had in our pipeline that we were unable to bring into the bank, we chose not to take our proposal further. For example, let say there was $12 million opportunity that was a LIBOR plus 200. In our mind it ultimately was -- by the competition one at LIBOR plus 150 and that was large national bank, for example there was other significant equipment mine that we had an opportunity to bank at LIBOR plus 225, it ultimately went for LIBOR 175, 100% financing. Again a large national bank. One last one at the top of my head about $2.5 million term loan, we were looking seven year fix 4%, the winner of that was 375, no fee, no prepayment. So those are some of the things that are taking place in the market. And it varies, it comes in goes so it's not necessarily sustained. These are just examples.

[Aaron Deer:]

That’s great. That's very helpful. And it does sound lot of the different competition coming from the very largest banks or from the non-banks.

[Hadley Robbins:]

In our recent experience, yes.

[Aaron Deer:]

Okay. And then, [indiscernible] lower your balances of FHLB advances, which isn't surprising I guess given the superb deposit in close that you guys have had, should we expect the rest of that funding there, is that maturing soon? And how about any other repo funding that you might let go, just trying to think about other funding opportunities given all the deposits that you have?

[Hadley Robbins:]

The FHLB advances, so our strategy is really to try to manage our overnight funds near zero. And I think what happened in December, it wasn’t any part of strategy to apply leverage to the balance sheet or anything like that. We had tremendous record loan production, half of that coming in December and we ended up at year end reporting some overnight borrowings and short term borrowings. As we work through the quarter, this quarter we had the deposit growth loans were essentially flat and we had portfolio of cash flow. So we were able to get that back closer to zero. The repo borrowings that you’re seeing reported are really for the most part we have a $25 million repo that’s been with us for about seven years. I think we have three years left on that. The rest of that’s related to I think collateralizing some customer accounts or something that gets reported as a repo borrowing but it’s not anything that we’re doing really from a liquidity or treasury management function.

[Aaron Deer:]

Okay great. That’s all I had, appreciate it.

[Melanie Dressel:]

Thanks Aaron.

[Operator:]

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

[Melanie Dressel:]

Great, well thanks everyone for joining us today and we’ll look forward to talking with you next quarter.

[Operator:]

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