Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to Columbia banking systems fourth quarter and full year 2019 earnings conference call.
This time all participants are in listen only mode. Later, we will conduct a question and answer session drove through both the telephone and web.
<unk> expense will be given at that time.
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As a reminder, this conference is being recorded I.
I'd now like to turn the call over to your host Clint Stein, President and Chief Executive Officer of Columbia banking system.
Thank you Mike Good morning, everyone. Thank you for joining us on todays call as we review our fourth quarter and full year 2019 results.
Which we really released before the market opens this morning.
The earnings release in the supplemental slide presentation are available at Columbia Bank Dot com.
Due to the hard work dedication of our talented bankers 2019 with her best year ever.
Record loan production, while maintaining our disciplined.
Produced industry, leading credit quality.
All of these factors combined generated record annual earnings exceeding the prior year high set in 2018 by 12%.
Tyler tireless efforts and all of our team members, who continually collaborate to do the right thing for our clients.
And the communities, we serve or evidence can these results.
Our leadership transition went very smoothly.
Our long standing approach to developing bench strength through ready now secession planning.
Right, it's a blueprint for seamless rotation of leadership assignments.
Our recent announcements have resulted in some new names for you.
But these are all leaders for the long track record of delivering exceptional performance.
Our current executive team, including the recent additions have an average tenure with Columbia of roughly nine years.
I want to take this opportunity to reinforce our commitment to driving long term value for our shareholders employees and clients.
The two new executive leadership additions were done in support of our commitment to the seamless integration of technology to drive efficiencies and increased client and employee satisfaction.
David Moore turbine an area guide or bulk seasoned professionals, who have been an integral part of Columbia success over the past decade.
I'm confident that their talent will support our future growth and enhance franchise value for many years comp.
On the call with me today are great great secret.
Our Chief Financial Officer, who will provide details about our earnings performance.
Chris Mary well, our Chief operating Officer, who will review our production activity and highlight the status of some of the initiatives we've been working on.
And Andy Mcdonald, our Chief Credit Officer Hooper provide some commentary on credit performance.
Following our prepared remarks, well be happy to answer your questions.
Let me remind you that we may make forward looking statements during the call.
Further information on forward looking comments, please refer to our earnings release documents our website.
Or <unk> SEC filings at this point I'd like to turn call over to Greg.
To review our financial performance.
Thank you Glenn.
We achieved record earnings of $194.5 million and bps of $2.68 in 2019, reflecting strong loan.
Deposit production temperate credit environment and to focus on driving net interest income.
Fourth quarter earnings of $46.1 million and EPS of 64 cents per diluted share was our best fourth quarter ever at amongst the strongest in our history.
Despite the interest rate environment net interest income was up nearly 2% in the quarter $224.8 million.
Reflecting the continued benefit of loan growth and a proactive efforts to mitigate exposure to falling rates.
Operating them was down three basis points from the linked quarter with key drivers being lower loan yields partially offset by lower funding costs.
Total deposits ended the year at nearly $10.7 billion down approximately 171 million from the prior quarter.
We did have a planned outflow of public funds of approximately 300 million in the quarter.
As we've said previously.
Public funds are more often they can to wholesale funding and abuse as an alternative funding sources, one economically beneficial to do so.
Noninterest income of $21.8 million was down from the prior quarter largely due to the $5.9 million gain on sale of owned real estate during the third quarter.
And was up $1.4 million compared to the fourth quarter of 2018, we have continued to make progress and generating noninterest income, especially in loan card financial services revenues.
Our expense run rate remains stable with fourth quarter non interest expense of $87 million essentially flat to the third quarter.
Our core noninterest expense ratio was 2.53% for the quarter as compared to 2.69% in the prior year quarter.
For the full year this ratio was 2.59% as compared to 2.68% for the prior year.
The full year 2019 expense impact of our did one initiatives was $6.9 billion, including.
$1 million in the fourth quarter.
Overall, we have had success on negotiating favorable contract pricing not have been able to capitalize more costs than expected.
Our effective tax rate for the full year was 19.5%, which is within our target range of 19% to 20%.
In line with her comments in the last earnings call. We are expecting that they want impact of adopting cecil to be fairly muted additional details will be available when we file our 10-K.
At this point I'd like to turn the call over to Chris.
Thank you, Greg and good morning, everyone fourth quarters record loan production from 427 million exceeded the previous record set in the third quarter of 2018 and propelled us to a new annual record of 1.6 billion, surpassing a record set last year by 142 million.
For the past three years, we are focused on increasing our production capacity. These efforts are directly correlated to the record results we announced.
During the fourth quarter, we experienced the expected seasonal reduction in line utilization butter bankers success on the production from offset this decline.
Our loan pipeline remains strong and we're confident that we can maintain this level production, while adhering to our credit discipline.
Our deposit base is very stable with year end mix that 59% business from 41% consumer.
It's consistent with our historical levels.
Our cost of deposits continues to be lower than our peers, reflecting that even split between noninterest bearing an interest bearing deposits.
We do expect are typical deposits seasonality in the first quarter as clients drawdown cash balances to pay down credit and other expenses.
Term loans comprised 72% of the production, whereas lines were 28% of the total the quarterly production mix was 60% fix 34% floating [laughter], 6% in variable. The overall portfolio is now 48% fixed 34%.
Floating and 18% variable.
New loan production throughout the quarter was booked at an average tax adjusted coupon rate of 4.36%, which is lower than the overall portfolio rate of 4.69%.
The portfolio rate declined 13 basis points during the quarter.
During the quarter commercial and multifamily realistic production was 46% 497 million of total production and see and I was 41% were 177 million up the total.
Commercial and multifamily real estate loan totals were up 208 million during the quarter driven by increases in office warehouse health care and multifamily sectors. Approximately 100 million of the increase was offset by a decrease in commercial real estate construction balances as Lawrence moved to pay.
Permanent status.
Hi loans were down 105 million tripping by seasonal activity and public administration, agriculture and manufacturing sectors.
During the quarter, we completed the consolidation of a branch, bringing the total to four branches and ARPU to sound in Oregon markets for the year.
We believe our retail delivery strategy will continue to be a blend of our physical and digital presses.
Our recently announced executive Vice President and director of retail banking and digital integration and the coal Sherman misery is responsible for blending unfold.
We believe she is uniquely positioned to do this based on her 25 years of banking experience, including the rollout of Columbia's neighbor hub branch concept. We will continue to actively look at markets across our footprint to access where we want to better position our branch network.
Digital is one piece of our expansion and we will continue the journey from a community banking perspective.
Expect improvements in our peer to peer money transfer capabilities online deposit account opening and our small business lending capabilities to go online later this year.
Now I will turn the call over to Andy to review our credit performance.
Thanks, Chris in summary, credit quality remained very stable in the fourth quarter and kids total assets were essentially unchanged as ones past dues and problem loan.
Net charge offs for the quarter were minimal had one basis point and for the year. They were only three basis point.
Our fourth quarter provision for loan and lease losses was 1.6 million, including 2.3 million for the originated portfolio offset by a release of 700000 before the acquired portfolios.
Provision in the originated portfolio was primarily driven by loan growth of 103 million.
Along with a ball in cement off with negative migration, which is not unexpected at this time of year due to the seasonal nature of some of our customers.
For the year, the provision for loan and lease losses was three and a half million.
Which included 5.7 billion for the originated portfolio in alignment with our record loan production.
Was offset by a recapture of 2.2 million in the acquired portfolio.
Again loan production was the primary driver as the originated portfolio grew 796 million for the year.
Offsetting this growth was contraction in the acquired portfolios of 444 billion, which allowed for them releases.
As of December 31st 2019, our allowance to total loans increased by two basis points during the quarter to 96 basis points of total loans, but was down three basis points year over year.
As always we like to remind folks at this ratio is impacted by our acquisition and the associated loans that were recorded at fair value.
Embedded in those valuations approximately $21 billion that discount for which approximately 13 billion is associated with the Pacific Continental portfolio.
3 million with the West coast portfolio in 2 billion with Beacon or no.
With that I'll turn the call back to click.
Thanks, Andy before we wrap up I want to take a moment to think Hadley Robbins for his service guidance and friendship.
It's been my personal privilege to work with him and we are a stronger company because of his leadership impact.
All of Us wish Hadley, and Gail along and prosperous retirement.
Along with her financial results, we announced our regular quarterly dividend of 28 cents.
We also declared a special dividend of 22 cents.
Which constitutes a payout ratio of 78% for the quarter.
This quarter's dividend will be paid on February 19th to shareholders of record as of the close of business on February 5th.
This concludes our prepared comments, Chris Andy Greg and I are happy to answer your questions.
Mike now we will open the call for questions.
At this time, because like you take any questions you might have for us today to ask a question simply click acuity button on the lower left hand corner of your screen type your questions. The open area and click submit.
If you would like to ask a question over the phone press Star then the number one on your telephone keypad to withdraw your question press the pound.
Well pause for a moment to compile the Q many roster.
Your first question comes from Luke Luke within your line is open.
Hi, Good morning, guys, how you doing.
Good good morning move.
Just a quick question first on just capital deployment was the switch to the special dividend this quarter.
Since the the repurchases in the previous couple of quarters was that more price dependent than anything else.
Yes, with the looked at upward movement in our stock price. It was so point, where we felt like from a capital management perspective.
Reinstituting, the special dividend for this quarter made more sense than than repurchases.
Okay.
That's helpful. Thanks, and then I'm.
Just kind of wanted to move into I think I haven't my notes here that you guys were beginning to offer online account opening in the first half of this year do you mind, just giving an update as to how that's tracking and then just a follow up on that is just the traction on the commercial online platform.
On the consumer fraud.
Beyond line account openings is projected.
Around the second quarter first half of this year.
As far as the commercial.
Transformation that was completed last year.
I believe September is shown we moved all of our commercial clients to the new platform is performing very well.
Okay.
That's helpful. And then just lastly, I think you guys have historically said that that given the investment in the digital spend over the past year and the kind of relinquishing of a lot of those projects you need to increase capacity I'm, just and so just wanted to see.
If you guys were continuing to the kind of to say that.
You are going to move downstream on M&A, given the excess capacity for you for ability to integrate and stuff like that just wanted to.
C O M&A conversations were going.
Yes.
You know the the conversations.
Kind of ebb and flow, you know and and anything that.
It's percolating out there we generally have a view into we haven't changed or are our stance or thought process around.
Our ability to move downstream on on on M&A with the conclusion of of most of our larger platform replacements. In addition.
So that's still very much our thought process and you know, it's just a matter of with M&A. It's it's.
It takes a lot of it's just timing dependent but footwear.
We're we're very active in and I'm looking at who would be a good potential partner for us and.
So from a business mix point of view as well as culturally and and we continue to stay very busy.
Devaluating, what the population or the pool of potential merger candidates looks like.
Okay. That's helpful. Thank you for taking my questions I'll step back.
Your next question comes from Jefferies. Your line is open.
Hey, this is actually lead by Posen on for Jeff Rulis. This morning.
I'm, hoping we like to thank you good morning, I just wanted to.
That's a little bit about expenses and kind of strategy. There you mentioned that the digital investment spend cannot be 6.9 million in 2019, Oh, just curious kind of where we're at overall in some of those.
Yeah transitions to the digital platform I'm kind of looking into 2020 respecting more of that less about the same.
What does that look like.
I assume you're referring had from an expense perspective, yeah. I think in 2019, we completed roughly 30 projects. So I think we waste characterize that as being midstream. It's a three year road map I think as we've talked about.
We've always said I think that the majority of the spend would come in 2019 and 2020 and then it's really the operational efficiencies around the edges and just continued development beyond that so I would I would characterize this as being midstream right now on your knock on question, maybe how much will be able to capitalize in 2019 above and beyond that 6.9 million.
That directly hip you know and the answer to that is 2.4 million has been deferred and or put into into depreciation through the end of the year. So the total spend and 29 team was nine and a half million dollars.
Okay, Great and then kind of staying to the strategy topic or you guys in talking about any priority shifts in strategy just with the changes in management team coming around the same time that rates seem the quite down.
No.
The the.
My comment during our prepared remarks about the the average tenure of of the folks on our executive Committee are being roughly nine years, we've all been I'm very much a part of.
Setting the strategy in the path that we've been on and executing on that and.
We've always bought into intuit, believing it so theres no hard right turns in terms of.
Strategic focus.
We'll obviously continue to evolve and some of the you know the changes on the or additions to the executive team or an example of that evolution with our digital roadmap and the investments we've made and ones that we continue to see on the horizon. It was very important.
For us to have that elevated and that was.
The reason for bringing Eric I'd.
To the Executive Committee.
In addition.
We added a technical focus or digital focus too.
Our our head of retail position and and Thats once again focused on making sure that we get higher adoption rates and realize our return on those investments and then with what we've done on the client and employee experience side.
No that's become more important than ever and.
Having somebody that it's got a creative minds like David or more Devine was very important for us too.
You know to to elevate to the executive group as well and so it's not a change in in that strategic focus, but it's more just evolving as the industry continues to evolve and our customer base.
Continues to evolve.
Okay, great. Thank you that's really helpful. And then lastly, just wanted to ask a little bit or one question about.
The margin.
Seems like there was some active management in the second half of 2019 with maybe a cost of funds and then also yields on more the security side.
Going forward.
Well I mean I would just.
Just say, we're really maintaining the course that we've sat in kind of articulated during 2019.
In terms of how we're managing our exposure to potential falling rates. So I don't think there into 2020, there's any shifting in the faade to your point in terms of the security strategy and kind of funding associated with that we've been targeting 800 million related to that strategy.
And you know year end, we probably.
That topic span.
So I think so the strategy hasn't changed but I think in 2020, you'll see us come down closer to that target range of 800 million, but otherwise you know were we feel very fortunate that we had the tools in place when we needed them to manage that exposure to buying rights.
Okay, Great. That's all I have I appreciate the fact that.
You're welcome.
Your next question comes from Jon Arfstrom. Your line is open.
Thanks, Good morning, guys.
Morning, John .
Few things.
Just a bigger picture on loan production, because you just sort of really good quarter relative to what you would normally see.
This time of year and I'm, just curious if you could.
Give us an idea of 2.2, maybe one or two things that might be different over the last few quarters is.
Taking more market shares with existing clients.
More activity or what would you really point to.
John I think it's Chris I think it's a combination of of many things you know on some of the comments we've talked throughout the year of adding teams in certain locations. Those teams came onboard and have produced very well and when you couple that with our experienced bankers.
That are out in the market making calls.
They're driving a higher pay higher production from that aspect as well.
Other than that I would tell you there.
Really falls into maintaining the credit discipline in our pricing discipline. So.
So it's a balancing act, but it's really it's the talented bankers that we have in the new folks that we brought on that continue that production.
Okay.
Just to remind you typically see a little bit the strengthening in Q1 of them more in Q2 is the right way to think about it.
Well, it's it's its largely weather dependent and we can see some strengthening towards the end of Q1, so focal date balances, but typically not averages, but it really is weather dependent on on the AG sector and and when they can get.
In the field so.
Right now.
It's hard for us to handicap that <unk>.
Okay.
And then two follow ups one on the margin help us understand what you're thinking about in terms of the margin I wouldn't call that high class problem, but at call. It a challenge because you have this big low cost deposit base, but.
Chris You also talked about new coupons or a couple into a new production coming down a little bit.
So it's fair to think about a little bit more pressure each quarter on the margin here or Greg do you feel like Youve got enough tools in place where you can you can manage to some margin stability.
Well you know again, John we really focus on managing net interest income person comes really managing the margin to be honest, but I think you've you've hit the two primary drivers for US one is the coupon on new production.
Deposit.
Pricing is important nuts, and we saw some room to go there is part of the program.
But I think the out of the other thing Thats really out of our control is just the interest rate.
Environment, you know what happens to the shape of the curve over time, but we feel that.
Yeah again, we're very fortunate to have had to put up the.
Protections in place when we needed them John So I think that's got that will help us on the and I side, but we're going to stay focused on what we control which is loan production in our deposit pipelines.
Okay. Good and then just one follow up on the digital spend.
I appreciate that capitalize number.
The total, but you should be close but is the message.
You said spending is 19 and 20, if the message that the spend.
He is in the run rate for 2020.
We may see some others come off in 2021 or is the message that there might be some incremental spend even 2020 relative to 19.
I think we're still going to see some spending 20 or 20.
We the guidance we provided last quarter was arranged a total investment in the eight to 10 million range.
And I My Best guess right now those are probably the lower end of that investment.
And with some ability.
To capitalize the probably not at the same level, we capitalize in 2020, just filling out brought concepts here John but.
I think we at some point in 2020, where we're headed very quickly approaching the point, where digital spend it's just part of our run rate and where that normalizes is still I think question, because we're always going to want to keep pace with the digital offerings that are kind of evolving and there's obviously ebbs and flows in that and the environment. So it's hard to look out and put in.
Iron curtain number thought in terms of where we start to normalize and how but.
We voice invested into business digital is now part of that investment and we were in 2020, I think and at that point words as part of the run rate.
Okay.
Yeah that makes sense Goodyear for you guys congrats.
Thank you thanks.
The reminder to ask a question over the phone press Star. One. Your next question comes from Gordon Mcguire. Your line is open.
Good morning.
Morning.
Greg I wanted to follow up on an earlier question about the securities portfolio. It looks like into period balances were up close to 400 million and if I back out the the premium amortization the yields were were up a good bit.
But based on your earlier answer it didn't sound like that was part of the security strategy did did I get that right.
It it wasn't really I mean, I think we had stronger loan deposit growth when you factor out the public funds, which really translated into more liquidity in their portfolio is the way I'm thinking about it on a net net basis.
Okay, and then just think about for next quarter I think deposit growth is a little bit seasonally soft or would you expect the the size of the securities portfolio to come in from what you're seeing it into period levels.
Yes.
Yes, I if deposits remained flat to coming down a little bit I would still expect some of the cash coming off the portfolio just to repay sort of wholesale funding we have out there, but obviously we're.
Staying focused on maintaining our target on the.
The interest rate strategy as well around 800 million, but I think there's probably some room to come down to that but I think it'll come down a little warden, but not a lot.
Thank you.
And then just on the expenses looked like there was an FDIC credit this quarter or do you have what's remaining to be realized in the timing of when that might come through.
It's it's roughly a million dollars left on that credit and we'll be able to tell us I take it when the FDIC tells us we can take it its obviously dependent upon their targeted deposit.
Ratio to look at and if we're fortunate it'll it'll be in the first half.
2020, but it's a million dollars level, it's down to a pretty de minimis level.
Got it.
Point, you touched on M&A earlier, I, just want to get a sense you talked in the past about northern California.
Just geography wise is their preference between in footprint or northern California, or or maybe any expansion of geographic focus.
At this point in time.
Well in footprint is.
He's easier.
You know relative to.
Generating cost saves a understanding.
The market dynamics, the political environment all of those things that we consider.
Well look at at the various markets.
But that doesn't mean that.
Shy away from from Northern California, or other markets.
There's there's we've done a.
For many years we.
Continually update this but we've done a pretty broad geographic analysis and identify the opportunities that are out there and when you look at.
California, It gets the world's fifth largest economy some of the most of the northern California market is very similar to the markets that were already operating within but.
No there's the local nuances of a local politics and market knowledge and so that we're just spending a lot of time learning about that market.
And.
What we've learned hasn't hasn't changed our opinion that we think that that there's there are some opportunities there.
But it it's you know it's more difficult to go into new market.
Then do something that's already within your existing footprint.
Got it.
And last one Andy I was wondering if you could provide some local color on the pause or the Boeing 737, Max Assembly at the written factory nearby Oh, what kind of impacts you you might see for local economy, and whether you see any kind of grocer growth or credit risk as a result to me exposure.
Sure.
Well, so far a boeing.
Then pretty proactive and.
Retaining the existing workforce in the rent in plant.
And they're deploying them up north to average and then down south here in the decorum or fredrickson area.
As well as trying to get.
Folks to go and relocate to Moses Lake.
Where they have.
200, 250 planes park that need maintenance.
Boeing understands that the labor pool that they have is.
Pretty unique and they don't want to lose that because when they want to get back into production.
I don't want those people to have migrated to other companies other industries or other geography.
Nevertheless, as those employees move to Everett Fredrickson and Moses Lake It will have an impact on the written area there'll be a domino effect in my opinion on restaurants dry cleaning gas station you know those kinds of activities.
We estimated that our exposure in and around the Renton plant.
Roughly $55 million.
So for us, it's a modest amount and that would include.
Just by simple addresses what the exposure is and that's both consumer commercial and commercial real estate.
I think that actually you know.
Boeing situation can impact other communities in a sense larger because of what happens to the subcontractors and I referenced the.
Company Spirit that laid off 2000 people they make the fuselage for the 737.
Here locally Boeing is trying to retain that employee base and so that's good for us.
And then with most of the local suppliers they've also created arrangements by which they will either continue to buy parts, even though they're not building plane.
Or they will provide financial support.
So we're we're optimistic that Boeing is doing all the right things to mitigate any big impacts on our economy, but we are monitoring it closely and we have identified the potential risks to Colombia.
So that that 55 million would include the any local supplier exposure.
Well the supplier exposure extends beyond just around the written plan.
Yeah. If you were looking at our total exposure, it's about 75 to 80 million.
Got it. Thank you for example, we have a customer in Eugene that is a big supplier to Boeing and Eugene is a long way from rent.
Yeah.
Thank you.
Yes.
There are no further questions at this time I will turn the call back over to the presenters.
[noise] well, thank you for joining us and I'm looking forward to talking with you again next quarter.
Bye.
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