Columbia Banking System, Inc. (COLB) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Wendy, and I'll be your conference operator today. Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking Systems Fourth Quarter and Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Thank you. I'll now turn the conference over to Ms. Melanie Dressel.

Thank you, Wendy. Good afternoon, everyone, and thank you for joining us on today's call to discuss our fourth quarter and full year 2012 results. I hope you've all had a chance to review our earnings press release, which we issued this morning and which is also available on our website at columbiabank.com. With me on the call today are Clint Stein, our Chief Financial Officer; Andy McDonald, our Chief Credit Officer; and Mark Nelson, our Chief Operating Officer, will also be available for questions following our formal presentation. As we outlined in our press release, our fourth quarter results showed strong loan growth, continued improvement in our credit quality, reduced expenses and increased noninterest income. Clint will begin our call by providing details of our earnings performance for the quarter and will clarify the improvements we've achieved in our core performance measures. Andy will review our credit quality information, including trends in our loan mix, allowance for loan losses and our charge-offs. And I will conclude by giving you our thoughts on the economy here in the Pacific Northwest, an update on our merger with West Coast Bank and a brief outline of our strategy 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. And with that, I will turn the call over to Clint to talk about our financial performance. Clint?

Thank you, Melanie. This morning, we announced fourth quarter earnings of $13.5 million, or $0.34 per share. This compares to $14.8 million for the same quarter of 2011, or $0.37 per share. Our reported earnings decreased moderately from the same quarter last year due to the substantial positive impact acquisition accounting entries had on the fourth quarter 2011 earnings. During the fourth quarter of 2011, we had net-of-tax earnings of $0.15, or $6 million and accretion income on the discounted loan portfolio, compared to less than $0.02, or $664,000, in the current quarter. Another significant item impacting the comparability of the fourth quarters of 2012 and 2011 is the other-than-temporary impairment charge of $3 million recognized in the fourth quarter of 2011 and recaptured during the current quarter. The combination of these 2 items was an increase of $0.10 per share for the fourth quarter of 2011. We've provided a table in our earnings release illustrating the impact of certain accounting entries associated with our acquired loan portfolios. The net effect of acquired loan accounting resulted in reduced pre-tax income of $166,000 for the current quarter. This is a reduction of $2.8 million when compared to additional pre-tax income from acquired loans of $2.6 million for the third quarter of 2012, and reduction of $12.7 million from the fourth quarter of 2011. I point out the dramatic reduction in the benefit of our acquired loan accounting from the prior year because it underscores the $0.04, or 15%, improvement in our core performance over the past 12 months. As I've mentioned in previous quarters, the individual components of our acquired loan accounting entries can change significantly by millions of dollars, in some cases, but the net change in the impact to earnings can be relatively inconsequential because of the offsetting nature…

Thanks, Clint. During the quarter, our non-covered loan portfolio increased approximately $50 million or 2.1%. Growth continued to be centered in commercial business loans and commercial and multifamily real estate term loans. Growth in business loans was centered in healthcare and social services and finance and insurance. Healthcare and social services growth continued to be driven by our professional banking practices group. The financial insurance segment is serviced by our commercial backers, and growth in this segment is being driven by our mortgage banking clients, who continue to originate loans at a record pace, thanks to the low interest rate environment. Growth in commercial real estate term loans was centered in non-owner-occupied properties, primarily warehouse properties and multifamily projects and, to a lesser extent, some retail products. Commercial Real Estate Construction loans also saw some modest growth with owner-occupied office and warehouse properties driving this growth during the quarter. For the year, the largest growth within the commercial real estate construction segment was in multifamily properties. And within the commercial real estate perm portfolio, the largest growth was again in warehouse properties. The area that showed the most growth for the year in our commercial business loan segment were again the healthcare and social services sector, along with agriculture, forestry and fishing industries. Growth in the ag and fish markets was a positive $41 million for the year, despite a seasonal contraction in the fourth quarter of $24 million, as our ag lenders continued to have success attracting new business. The growth in business loans was, however, offset by a continued contraction in our residential perm and portfolios, which declined by $4 million and $3 million, respectively. The decline in these segments continues to be driven by consumers refinancing lower-cost conventional first mortgages, which helped out our mortgage banking business…

Thanks, Andy. While the economic picture here in the Pacific Northwest continues to be a bit bumpy, the overall trend is toward continued positive improvement. The larger metro areas in both Washington and Oregon are recovering faster than the states as a whole, and they are setting the pace in job growth, real estate and other leading economic indicators. Washington State's unemployment rate for December was at its lowest level in 4 years, falling to 7.6% from 8.5% at the end of the prior quarter back in September. The unemployment rate for the Seattle-Tacoma-Bellevue area is down to 6.8%. While the unemployment rate continues to improve, some of the declining rate is due to shrinking labor force, as people stop looking for work. During the year, 2012, however, our state gained over 42,000 jobs. The construction sector, which was significantly impacted by the recession, grew faster than any other sector last month and created almost 1 of every 4 new jobs in Washington over the year. Construction employment is still about 60,000 jobs, below where it was in December 2007. That's about a 30% drop. Other bright spots were education and leisure and hospitality sectors. While Oregon's jobless rate remained steady at 8.4%, they added about 2,000 jobs in December 2012. In all, the state gained over 22,000 jobs during the year, although its unemployment rate has hovered between 8.4% and 8.9% for all of 2012, which is above the national average, which was 7.8% in December. The private sector accounted for all of the net employment gains, as government employers and manufacturers cut jobs. Oregon's trade, transportation and utilities sectors added 2,900 jobs, or 2,500 more than economists had expected, and retailers had a good month adding almost 2,000 jobs during December. Some good news for both Washington and…

[Operator Instructions] Your first question comes from the line of Joe Morford.

I guess, just a couple of questions on the loan growth, specifically I guess in the commercial business side. Did fiscal cliff issues and/our year-end tax considerations have much of an impact on the volumes in the quarter one way or the other? And separately, was there any increase in line utilization rates that you saw?

Mark?

Hi Joe. Yes, I -- I mean, clearly, there's always year-end issues every year, and I'm sure that was a motivation on some of the folks trying to get deals done during the -- at the end of the year, but I wouldn't say that was significant. And we have a bit of overlap coming into January as well. So clearly, those items weren't as critical on year-end. Our utilization rates are off just a little bit in the fourth quarter, I think that's a seasonal impact and I really don't see much change in that. Overall, during the year, we saw our utilization rates improving.

Andy, is there anything you'd like to add?

Yes. Some of the utilization rates have declined and that's primarily driven by some of the activity that's in the ag and fish portfolios, as those customers are paying down and they won't start re-borrowing until later this year. The fisheries for crab will open up in February, we'll start to see that, and of course, the farmers will get more active. But surprisingly, we were not -- we didn't see as many people take advantage of -- or concerned about capital gains issue in terms of pulling money out of their companies, but we did see an increase in merger and acquisition activity, as people just sold their companies.

Right. Okay. And just in general, kind of broadly speaking, what are the current thoughts or expectations for organic loan growth in 2013, kind of excluding the acquisition? And is the mix still likely be more CNI [ph] and CRE?

I think, to give you just a broad generalization, Joe, I would say 2013 will be a reflection of what we've seen in 2011 and 2012, just a continuation of that. Our folks are very focused. We've got good pipelines. And we've got good prospects out there, so I expect that we're just going to see a continuation of that trend of growth internally [ph], aside from the acquisition.

Your next questions come from the line of Brett Rabatin.

I wanted to ask, if I heard it correctly, the loan portfolio yield declined 13 basis points and the securities portfolio declined 16, and I think that was 46 basis points lower what you're originating. I was wondering if you could talk a little bit about the pro forma margin. And just sort of -- thinking about your current margin plus the accrual accounting, obviously, that's going to be coming through with West Coast and sort of -- if there's any update to kind of the margin on a going forward basis?

Clint?

Brett. There's a lot of things that I kind of touched on during my prepared remarks that will impact the margin. Probably, the biggest thing that we see as, I guess, a headwind for the margin is -- just the cash that we've accumulated in anticipation of the West Coast closing. And I mentioned that's 25 basis points. If everything else remains the same, that's the cost of -- or the impact to the margin of that. And we've had great deposit growth, and while it's somewhat connected with the buildup of the cash and the impact for the West Coast deal, at the rates we're bringing it in, a lot of it is noninterest bearing. But even in overnight funds, it's adding to incremental earnings, but it's impacting the margin. And for the fourth quarter, that was 14 basis points. So there's a lot of variables. Loan growth is obviously in our asset mix, on what we do with the deposit funds that come in, in closing the merger. So I guess, with all those variables, I'm hesitant to give you a real tight projection on what the margin's going to do. I do think that we had a little bit of catch-up with what the rest of the industry experienced in the third quarter. Our operating margin was only down 4 bps in the third quarter, and I think that some of that was building later in the third quarter and into the fourth quarter, the early part of the fourth quarter. And then we saw some of those pressures subside [ph] as we got into December. And I'm thinking about the way our deposit growth happened in the late third quarter and early fourth quarter. I'm thinking about what happened with the investment portfolio in terms of prepayment speeds on our mortgage products and what they've done over the last month -- actually 2 months, because it's [ph] what January looks like. So I feel a lot better about the margin in terms of going forward. But there are so many variables, I can't necessarily give you an exact number.

Okay, that's fair enough. And then, I just wanted to maybe get a little color around -- West Coast reporting today, they continue to shrink their loan portfolio a little bit. I was just curious about your thoughts on getting them more engaged and growing going forward. And then, maybe just any thoughts on timing of expense savings and how that looks relative to last quarter.

Well, I guess, what I've -- would have to say is that, that will be a question that you would need to pose to West Coast since we're -- I mean, we can certainly speak to our performance. But I do not sense at all that there's a lack of engagement on their people's part. So I guess that I would just leave it at that.

Well, I don't mean it quite that way. I meant, perhaps, just maybe any color around their portfolio. And just, are payoffs impacting what they're doing? Or do you have any sense of that?

Well, all that I know is from what I read in their press release. And probably, the -- what they showed in terms of line and credit usage going down to 34%, certainly had an impact on [indiscernible], I would say. That was the biggest factor from what I read.

The second part of your question, Brett, on timing of expense savings. That's a good point that we should clarify is, when we announced the transaction, all of our modeling, we were just assuming a 12/31 close for modeling purposes. And with our cost base, we haven't deviated from those original numbers. But I think it warrants clarifying that the cost saves we really should look at, in terms of months 1 through 12, 13 through 24, as opposed to -- and it's just correlated to fiscal year 2013 and '14, because we were assuming essentially a January 1, 8, in those projections. So when we projected 50% cost saves in the first year, that really builds through Q2 '13 through first quarter of 2014. And then, we would expect it to build into in -- starting in the second quarter of 2014, where we have the full cost saves.

And the integration process is really working very, very well on -- Mark Nelson from Columbia and Hadley Robbins from West Coast are chairing that integration teams, and they're just doing a great job, and the teams are working well together. So very, very encouraged at the progress that we're making.

Your next question comes from the line of Matthew Clark.

On the margin, Clint, maybe can -- and I'm not sure if you mentioned this in your prepared remarks or not, but with the drag from hording cash ahead of the team closing the West Coast deal, we assume that you would get back most, if not all, those -- the 25 basis points in subsequent quarter?

Yes. Assuming that the close of the merger is essentially towards the end of the quarter, this quarter or the beginning of the next quarter, then you'd get that benefit immediately, and it would be sustained throughout the quarter.

Okay, great. And then on TAG, any impact there? I mean, your deposit growth continues to remain fairly strong here, I'm just curious whether or not you could quantify or have any sense for whether or not to expiration of TAG had any impact on you guys? In terms of inflows, obviously?

Yes. Well I think, to be honest, one of the things that has been very positive in terms of the public's perception of our strength has been the forward lift that I referenced in our prepared remarks on -- and the fact that even before the TAG program was put in place, we had alternatives for customers who were concerned about insured deposits. So it has been very positive, but it kind of gets back to Clint's comments on deposits today, has kind of a reverse impact on our NIMs that will someday change, but deposits keep flowing in.

Okay. And then, just on the estimates out there, for you all, seems to be a little bit of a disconnect relative to the guidance as you originally provided when you announced the West Coast deal in terms of pro forma estimates. Do you have a sense for whether or not they are just a model that haven't been updated to incorporate the deal? Or just curious how you view the estimates out there relative to your guidance?

As I've looked at it, my assumption has been that not everybody's updated their models.

Your next question comes from the line of Jeff Rulis.

Clint, a little follow-up, I may have missed the last portion of your -- just kind of the commentary on core noninterest expense. You talked about the $40 million level this quarter, as core knocking out of those few items. I guess, did you say that, that can be improved upon going forward? I missed that portion.

I didn't specifically state it in that regard. I guess, I was drawing the correlation to it continues to improve. It was down just under 4% from the prior year period. It was down a little bit more from the third quarter. But it's something that we're continuing to focus on, the initiatives that we have in place, one of the things I did mention is that as we look at allocating the resources across our customer delivery channels, how do we do that in the most efficient manner. And some of the progress we made in 2012, which resulted in a reduction of 50 FTEs, I could see those initiatives are ongoing, they're part of how we run the bank. So I think that you will continue to see improvements.

But the comments that you made were sort of more historical, what the trend line has been and -- up to this point, and then, some optimistic view of perhaps further improvements.

Right. Yes. I wasn't trying to -- I mean, I wanted to highlight the trend line because I think it's very indicative of the work that our management team has done. I didn't necessarily give any type of guidance in terms of how that's going to continue to trend.

Any update to the merger cost, the $30 million that you've stated previously as you go through this and analyze it further? Is that still a number that you're comfortable stating that seems about it?

It's not going to go up. I don't think that it would go up from there. There are still a few variables that we're looking at that could bring it in a little bit under that. But I don't see it going up.

We're still pretty comfortable that $30 million is a good goal.

Great. And Melanie, maybe one last one. Just on the capital plans. With the dividend announcement this -- today and in terms of -- it's safe to assume no real significant deployment through the close? Or still kind of be on the lookout? Any update on kind of the thought process right now?

I would say what I say all the time, and excuse me for repeating it, but we look at all different opportunities to deploy our capital effectively. But the close is getting pretty near, so I wouldn't expect any surprises.

Your next question comes from the line of Aaron Deer.

I just have 3 quick questions. One, Melanie, has a date been set for the systems integration? And what is that [indiscernible]?

It's not a firm date. But the conversion itself will occur, we hope, in late August.

And the -- it looks like the -- if I followed this right -- and forgive me if you've discussed this earlier, but the FHLB prepay charge, did that come through the margin? And if so, is that about 5 basis points, is that right?

That came through the reported margin. We excluded it from our operating margin calculation. And yes, on the reported margin, it's 5 basis points.

All right. Fine. And then, Andy, the TDR balance that's not included in your NPA total, do you have that number?

I don't have that on me. Sorry.

[Operator Instructions] And there are no further questions at this time.

Well, great. And thanks, everyone, for joining us on the call, and we apologize for the coughing and our voices. Whatever is going around, it seems like we all have today. So thank you, and we'll talk to you next quarter.

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