Melanie J. Dressel - Chief Executive Officer, President, Executive Director, Chief Executive Officer of Columbia Bank, President of Columbia Bank and Director of Columbia Bank Clint E. Stein - Chief Financial Officer and Executive Vice President Hadley S.

Robbins - Chief Operating Officer, Executive Vice President, Chief Operating Officer of Columbia Bank and Executive Vice President of Columbia Bank Andrew L. McDonald - Chief Credit Officer, Executive Vice President and Chief Credit Officer of Columbia Bank.

Joe Morford - RBC Capital Markets, LLC, Research Division Jacquelynne Chimera - Keefe, Bruyette, & Woods, Inc., Research Division Jeffrey Rulis - D.A. Davidson & Co., Research Division Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division Matthew T. Clark - Sterne Agee & Leach Inc., Research Division.

Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking System Fourth Quarter and Year 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Melanie Dressel, President and Chief Executive Officer of Columbia Banking System..

Thank you, Malaya. Good afternoon, everyone, and thank you for joining us on today's call to discuss our fourth quarter and full year 2014 results. I hope you, all, have had a chance to review our earnings press release, which we issued earlier this morning. The release is also available on our website, columbiabank.com.

As we outlined in our earnings release, we have continued to build on the momentum created with our acquisitions, West Coast in 2013 and Intermountain, which closed last year on November 1.

Our bankers throughout our market area continued their commitment to attracting and maintaining full-service relationships with their customers, resulting in record loan production for both the quarter and the year. Clint Stein, Columbia's Chief Financial Officer, is on the call with me today.

He'll begin our call by providing details of our earnings performance. Andy McDonald, our Chief Credit Officer, will review our credit quality information; and then Hadley Robbins, our Chief Operating Officer, will be covering our production areas this afternoon.

I'll conclude by giving you our thoughts on the Pacific Northwest economy, including Washington, Oregon and Idaho, and a brief outline of our priorities for 2015. We'll 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.

And for our full discussion of the risks and uncertainties associated with forward-looking statements, please refer to our securities filings and, in particular, our Form 10-K filed with the SEC for the year 2013. At this point, I'll turn the call over to Clint to talk about our financial performance..

compensation and benefits, $2.1 million; occupancy, $44,000; advertising and promotion, $437,000; legal and professional services, $1.8 million; and miscellaneous expense of $175,000. The operating net interest margin contracted 5 basis points from the prior quarter to 4.17% as a result of the Intermountain acquisition.

You might recall that Intermountain had a preacquisition margin of 3.49% versus our operating margin of 4.22%. Our average cost of interest-bearing deposits for the quarter ticked up slightly to 8 basis points while our cost to total deposits remained unchanged at 5 basis points.

The 1 basis point increase is attributed to the deposit base acquired with Intermountain and is expected to moderate as we layer in our pricing discipline during the first half of 2015. Now I'll turn the call over to Hadley to discuss our production results..

Thank you, Clint. Total deposits at December 31 were $6.92 billion, an increase of $680.3 million or 11% from $6.24 billion at September 30. The addition of Intermountain deposits largely explained the significant increase.

The bank's organic deposits, excluding Intermountain, declined slightly by $57 million in the fourth quarter, yet full year organic deposits increased $238 million or about 4%. At year end, overall core deposits were $6.62 billion, representing 96% of total deposits.

The average rate on interest-bearing deposits for the fourth quarter was 8 basis points as compared to 7 basis points for the third quarter. The small increase reflects the impact of adding Intermountain to our deposit mix. Loans were $5.45 billion at December 31, up $622 million or 13% from $4.82 billion at September 30.

Like deposits, the net increase in loans was driven by the acquisition of Intermountain. However, new loan production was also a significant factor. New loan production peaked in the fourth quarter at $325 million. Total new loan production during 2014 was at its highest level in the company's history at $1.04 billion.

High levels of production resulted in net organic growth in the fourth quarter of $120 million. Full year net organic growth was $426 million or about 9.4%. The mix in new loan production during the quarter was predominantly centered in Commercial business loans, $178 million; in commercial Real Estate loans, $92 million.

Term loans accounted for roughly $218 million of total new production. Advances under new lines of credit represented about $107 million. New production was fairly evenly distributed in terms of size. 30% of new production was over $5 million; 32% was in the range of $1 million to $5 million; and 38% was under $1 million.

In terms of geography, 66% of new production was generated in Washington, 30% in Oregon, 4% in Idaho. During the fourth quarter, average coupon rates for loans, excluding the impact of Intermountain's portfolio, continued to decline.

Current low interest rates coupled with competitive market conditions for good quality loans put pressure on pricing for both new and existing relationships. At year-end 2013, the bank's tax-adjusted weighted average coupon rate for the loan portfolio was 4.73%. The average coupon rate declined each quarter in 2014.

At year end, the average coupon rate was 4.49%. Commercial business loans ended the fourth quarter at $2.1 billion, up about $290 million or 16% from the third quarter. As mentioned previously, the increase in fourth quarter outstanding loans is largely due to bringing on Intermountain loan totals coupled with the strong levels of new production.

Loan activity was broad-based with outstanding loans growing in many of the primary industry sectors found in the Pacific Northwest. Those sectors where outstanding loans increased the most include agriculture, transportation, public administration and manufacturing.

Loan volume on lines of credit expanded with new organic relationships and Intermountain loans, but we did see a modest decline in utilization. Line utilization dropped from 54% to 53% between third and fourth quarter, which is consistent with seasonal borrowing patterns in a few key industry sectors such as agriculture.

The commercial Real Estate portfolio, including commercial construction, ended the fourth quarter at $2.8 billion, up about $327 million. The asset type with the largest positive change in outstanding loans was term owner-occupied warehouse, which increased $45 million.

Other asset types with significant increases were term investor Real Estate properties, $44 million; and commercial office, $41 million. The commercial Real Estate category with the largest decline was multifamily construction.

Multifamily construction loans dropped about $14 million primarily as a result of stabilized properties moving to the secondary market for permanent funding. As we begin 2015, our loan pipeline continues to show strength. Deal flow continues to be fluid with heightened competitive conditions making outcomes predictable.

That said, our current C&I and commercial Real Estate pipeline is comparable to the amount and composition of loan types seen in recent quarters. That concludes my comments. I'll now turn over the call to Andy..

Thanks, Hadley. For the quarter, the company had a provision of $1.7 million, primarily driven by the need to establish a reserve for Intermountain as well as strong organic loan growth, which of course, was driven by our record origination activity.

Net charge-offs for the year were a little over $9.6 million with most occurring in the portfolios acquired through FDIC-assisted transactions. For the full year, we had a provision of $6.7 million, meaning we released $2.9 million in reserves during 2014.

We are comfortable with this release given that our allowance is 1.28% of total loans, and more importantly, 222% of our nonaccrual or nonperforming loans.

I would also like to remind folks we have over $50 million in loan discounts associated with the Bank of Whitman, West Coast and Intermountain portfolios, which could also provide a shield for loan losses.

For the quarter, we saw nonperforming assets increase by $3.6 million principally due to the Intermountain acquisition, which added $5.2 million in nonperforming assets. Nonperforming assets, excluding Intermountain, declined a modest $1.6 million. For the year, we reduced nonperforming assets by approximately 25%.

As of the end of the quarter, we had about $13.6 million in recorded investment in TDRs, of which about $2.4 million is included in the NPA category, leaving $11.2 million in performing TDRs. Past-due loans at quarter end were 49 basis points compared to last quarter when they were 37 basis points. With that, I'll turn the call back over to Melanie..

Thanks, Andy. I'd like to briefly give you an update now on the economy here in the Pacific Northwest, including Washington, Oregon and Idaho. Although the economic recovery continues to be somewhat uneven, leading indicators reflecting the big picture in our market are looking up.

Washington state's unemployment rate has consistently been lower than the national rate since the end of 2012. The December unemployment rate was 6.3%, down from 6.7% in December 2013. It's edged up, however, for the third month in a row. Since job prospects are brighter, more people are entering the Washington job market.

Job creation has been good the past 12 months. Year-over-year employment growth was the highest since 1977. Jobs rose by almost 83,000 from December 2013 to the same month in 2014. The private sector saw over 73,000 new jobs while 9,500 were generated in the public sector.

According to the Employment Security Department, the state had its best year since 1997 when it comes to total employment. Washington gained jobs every month except one in 2014 and experienced increases in 12 of the 13 major industries.

Housing prices continued to rise in the Puget Sound region with the median price of single-family homes up 4.8% over the year, partly due to the lowest supply of active listings in a decade. Despite the scarce inventory in many areas of the region, the year had a strong finish with December sales outpacing the same month a year ago.

Oregon's economy finished 2014 with a record pace of growth. Although the state is still above the national unemployment rate, they're seeing a stronger rate of job growth than the country as a whole. After months of stagnation, Oregon's unemployment rate dropped to 6.7%, its lowest point in 6 years.

This was a result of rapid job growth the last 3 months of the year coupled with a stable workforce. In fact, job growth was record setting. During the fourth quarter, employment grew by over 24,000 jobs, the largest 3-month gain since 1990.

In addition, the job growth, broadly -- the job growth has been broadly distributed across many industries, spread beyond the Portland metropolitan area to other parts of the state. Portland has been largely responsible for driving the state's growth, not surprisingly, since the metropolitan area accounts for about 3/4 of the state's economy.

And according to the Oregon Center for Public Policy, Oregon's economy has grown over the past 13 years nearly 3x faster than the national economy. When adjusted for inflation, the gross state product grew 62% compared to the nation as a whole growing 22%.

Additionally, the state has enjoyed the second-highest level of economic growth among all states, second only to North Dakota. Relatively low housing costs and a desirable region make Oregon the #1 destination for people relocating for the second year in a row. The ranking is from United Van Lines in their 38th annual study.

More than 66% of the Oregon moves conducted by the company were people relocating to the state rather than moving out. The Idaho unemployment rate ended the year at its lowest level in 7 years, dropping to 3.7% in December 2014, down from 3.9% in November.

With the exception of the Boise metro area, both the number of jobs and the labor force declined slightly during the month. Job losses were highest in natural resources, private educational services, hotels and motels, other services and government at all levels.

While the unemployment rate is considerably under the national rate of 5.6%, Idaho still has a challenge increasing the number of higher-paying jobs in the state. Most of the gains have been in lower-paying service fields. In 2013, Idaho's real GDP grew 4.1% to $57 billion.

The largest contributors to that growth was agriculture, forestry, fishing and hunting. The total value of the goods and services produced in the state grew just under 7% in 2013 to $62 billion, the third-highest growth rate nationally. One sector that continues to rebound is construction, especially in the Boise market.

In short, the economy is continuing its steady improvement here in the Pacific Northwest. As I mentioned earlier, despite the potential for distraction with 2 relatively large acquisitions in the past 1.5 years, our bankers have continued to focus on growing organically as well.

As always, they have been externally focused on both their existing and prospective customers, resulting in the record-low originations we've been talking about. We are committed to grow throughout our markets here in the Pacific Northwest.

The major metropolitan areas have provided us with strong loan growth opportunities, and we will now have the benefit of concentrating on the Boise market as well. Our retail deposit base throughout our footprint continues to provide low-cost funding for our loans, resulting in a fairly strong and consistent NIM.

Other priorities involve growing noninterest income and executing on opportunities to deliver on further expense reductions. This continues to be of particular importance as the regulatory burden grows disproportionately.

All of us here at Columbia were so pleased to rank -- to be ranked #17 on the Forbes list of best banks in the country, up from #31 last year. For the fourth year in a row, we ranked the best in Washington and second in the Pacific Northwest. We are particularly gratified since the list is based on safety and soundness measures not just on growth.

This morning, we also announced a regular cash dividend of $0.16 and a special cash dividend of $0.14, both of which will be paid on February 25 to shareholders of record on February 11. We are pleased to pay a special cash dividend for the fourth consecutive quarter.

Both dividends totaling $0.30 constitute a payout ratio of 88% for the quarter and a dividend yield of 3.74% based on our closing price yesterday. 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, Malaya, will you please open it up for questions?.

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

I guess first question is, it looks like the end-of-period earning asset balances were a fair bit higher than the average even kind of factoring in the deal.

Did a fair amount of the loan growth come later in the quarter? And also along those lines, given the healthy pipelines you talked about, how do you feel about organic loan growth this coming year relative to the 9.4% rate of increase in 2014?.

Clint?.

Well, I'll take the first part of that. A little more than half of the loan growth occurred in December, and a lot of it was probably in the second half of December. So that's probably what you're picking up on there. In terms of the pipeline, I'll defer to Hadley on that..

Yes, I'll just echo Clint's comments. It was a nice push towards the end of the year, and the pipeline, as I indicated, is very similar to what we've seen in prior quarters. And at least through the first quarter, I feel very confident that loan rates will approximate what we've seen..

Okay. That's helpful. And then any kind of updates at all about anticipated cost savings from Intermountain and the timing of the realization there other than it sounded like you're targeting this 2.9% expense to asset ratio by year end..

We're making a lot of headway on and really pleased with the way the integration process is going.

Clint, do you want to comment on specifics?.

Sure. During our original investor call related to Intermountain, we had an estimate of $8.6 million in cost saves. That number is -- I feel really comfortable based on what I know today.

Similar to what we did with West Coast going forward, as we get a little deeper into the integration, we'll report back our progress both on where we're at with cost savings versus what we talked about in July when we announced the deal and then also our transaction costs. So it's a little bit preliminary.

What I can tell you is that we've already started to realize some of those cost savings. Most of what we have realized didn't have an impact on the fourth quarter. A lot of it was at the end of the fourth quarter.

The core conversion is scheduled for mid-May, and it's usually about 4 weeks beyond that point that we really start to make headway on our projected cost savings because we're not maintaining duplicate systems, and we can really start driving the efficiencies. Some of that will spill into the third quarter.

That's just the nature of the core conversions. Usually by the time the processors settle up with us, it takes them 6 to 8 weeks to figure out what we owe them for it. So the first clean [ph] quarter I expect will be the fourth quarter of this year.

In terms of acquisition-related expenses, you're going to see those probably heaviest in the second quarter, and then like I said, the third quarter will be impacted as well, and there'll be some in the fourth quarter, but we'll provide good visibility around that..

Your next question comes from the line of Jackie..

Touching again on -- just a quick question on expenses, not necessarily the M&A costs and the cost savings, but just the ones in the quarter. The run rate was a little bit lower in the uptick than I would have expected.

Were there any unusual onetime items?.

Clint?.

Yes. Well, the first one is we had Intermountain from November 1 forward. So we didn't have a full quarter of their run rate. The other thing that typically happens in the fourth quarter is we'll take a look at our accrual that we make and adjust throughout the year for things like our 401(k) contribution related to our profit-sharing plan.

There was about $450,000 related to that. That seems to be about what we have every year. It can vary.

But then probably the bigger issue was we implemented ASU 2014-1, which was some accounting guidance that came out about a year ago related to accounting for low-income housing credits and partnerships, and for CRA purposes, we invest in several of those.

The historical accounting practice has been that you take the write-off or the expense portion of those partnerships through noninterest expense, and then you recognize a tax credit through income taxes. So it was on a gross basis. The new guidance requires that you net those through -- below the line through income tax expense.

So as part of that implementation, there was about 800 -- roughly $800,000 that would have impacted the run rate in -- favorably impacted the run rate in the fourth quarter that wouldn't be there going forward. But I included both of those adjustments when I gave you our core operating run rate of $60.7 million.

So if you're looking at the impact, it's really unreported, but for that core number, that $60.7 million was a good number..

Okay. So that additional -- the benefit of the $1.2 million is in -- if that's taken into consideration with that.

So the only variance then would be an additional month of Intermountain?.

Correct..

Okay. And then just one other one that I had. When I look at the reserve ratio now that it's all in combination together and it's with the covered and the noncovered portfolio, obviously, there's a lot more variation between the movement of reserves and the cover portfolio.

How should we think about the movement of that ratio going forward?.

Andy?.

Well, the ratio is obviously impacted a great deal compared to a lot of our peers due to the size of the portfolios that have discounts. So as we continue to see improved credit quality metrics, the discounts actually don't really come into play too much, but they do continue to drive the reserve lower.

So the reserves that we actually have for the discount portfolios are relatively modest because of the discount associated with them. Our originated reserves, obviously because they don't have discounts, is a larger number, but we will probably continue to drip down in our reserve ratio relative to total loans over the next 2 to 3 quarters.

However, our reserve to our nonperforming loans will continue to improve..

Okay.

So the change in how it's reported shouldn't create all that much more volatility versus legacy quarters when it was just all on the noncovered?.

Correct..

Your next question comes from the line of Jeff Rulis..

I think Hadley commented on sort of this competitive landscape. Just digging a little deeper, if you could comment on where that competition is coming from, big or small? And is it less or more aggressive than you've seen and even last layer would be sort of pricing or structure where the most competition's coming from..

Wells, BofA, Chase. And then we do have a fair amount of competition among other community banks within our footprint. In terms of the pricing mix, fourth quarter saw about a split 50-50 between fixed and variable and rates on the fixed side, 10 -- 3 to 10 year is the range, most around 5, spreads about 2 1/4%, 2 3/4% over FHLB.

On the prime side or the variable side, the prime rate, prime plus 1% in terms of LIBOR, 1 to 3 months, 1 3/4% to 2 1/2% I think is about kind of the competitive range that we see..

Okay.

And where you're seeing, I guess, aggressive terms, is it more pricing or structure where there are some credits that you pull back on?.

I think pricing has certainly been the point of competition, but we have seen some change in competitors' willingness to hold to structure, and I think that it's not great at this point, but there are cases where we're seeing guarantees released, et cetera..

Okay. And maybe one for Clint on the -- just thoughts on the core margin going forward. You kind of slammed together another bank in here, and just I guess going forward, thoughts on the core margin..

Sure. One of the things that our -- I guess our asset mix changed a little bit. Investments became a little more -- a little bigger piece of the balance sheet than where we were prior to the acquisition. We obviously earn less in the investment portfolio than we do on the loan portfolio.

So to the extent that as we work through the next couple of quarters we continue to have the level of production that our bankers have had last year with over $1 billion of originations. I think that we'll get back to a similar asset mix as to where we were, and that helps the margin.

Without the acquisition, I believe the margin would have been relatively flat with the prior quarter. Part of the reason I'm not saying it would've expanded is because of the $325 million of production. We already stated that a little more than 50% of that occurred in December. So we didn't get the full benefit of that during the month.

Some of the things that we can do or that we've already done, and they're small things, but the small things add up, is on the funding side for Intermountain. We've repaid their trust preferred securities. They had about $17 million there. That's helpful. The CD book that they had was running off.

It was higher cost, and it was running off pretty nicely over the last couple of years. They had done a good job with that. That continues to happen, and so that deposit base, the cost will continue to come down.

And then as we look at standardizing their deposit products with ours, we should get better alignment with pricing there as well, and that'll help the margin a little bit. So that's a long-winded way of saying that it all depends..

Fair enough. Melanie, one last one. I guess any surprises in the Idaho market.

You sort of long sought after to get into there, and I guess anything you've seen, at least initially, that is different or largely consistent with the rest of your footprint?.

I think that -- I can't think of any big surprises. We did a lot of talking before we announced the acquisition. Curt Hecker has just really been a strong leader, really continues to keep people focused on the right things, very, very similar approach to customer service and really wanting to put loans on the books to keep deposits.

So people are really well-aligned throughout the company, including Idaho..

Your next question comes from the line of Aaron Deer..

Just a couple of quick follow-ups.

One, Clint, in discussing the impact of the ASU 2014-1, what impact or what -- with that now in place, what do you expect for an effective tax rate going forward?.

It's going to be 30, 31. On an annual basis, the whole impact of that is it moves about $1.1 million of expense into income taxes. So on a relative basis, it's not a big number, and I should have pointed out when I talked about this with Jackie's question is that bottom line impact to earnings is 0. It's just a presentation issue..

Sure. I understand. Okay. And then, Hadley, in your comments, you mentioned that in the quarter, multifamily was down a bit. I know that when I was up in Seattle recently, notwithstanding the terrific economy and perhaps because of, there's a tremendous amount of cranes going on there, and I know there's a lot of apartments coming online.

I'm just curious if the reduction that you saw in multifamily this quarter is maybe a conscious pullback in anticipation of all the new production that's coming online there? Or is that just kind of an aberration?.

In previous meetings, I indicated that we're very selective on our multifamily construction. We felt that the market is something that we have to watch. Have to watch the permitting that's taking place, the number of rooms coming on. And we're still looking for good opportunities, but as I said, we're very selective of those that we bring on..

Your next question comes from the line of Matthew Clark..

Maybe just -- most my questions have been asked and answered, but on the production side, the $325 million, did Intermountain contribute at all to that production this quarter? And just getting that whether or not that run rate could go higher as they gain traction..

Well, the, as you know, fourth quarter was a peak for us and that there was a significant push to book loans at year end. And the amount of production that was tied to Intermountain, again, was limited. It's $12 million to $13 million in terms of the production number that is overall $325 million.

My sense is that I need to get a little bit more experience with Intermountain's production before I'm able to give you any kind of meaningful guidance, but I think that what we've seen so far is a good indicator as any, and that's probably over 45 days, and that I'll be watching that closely.

So I'll just assume that'll be an indicator for us to track to..

And Matt, obviously, our first line of defense is retention of existing customers. So probably more of the activities have been retention-oriented versus calling on prospects. So I would imagine that it's going to improve once we kind of get through that, that period..

Okay. And then with all the dislocation that's going on in your markets with a couple of large deals, one last year, one that's still pending, can you talk about opportunities to acquire talent if you're targeting to bring over talent and portfolio to the business and whether or not that some of that's already occurred or not..

We're always looking for good talent, and we don't have one market where I don't feel that we have the opportunity to grow. So yes, we have had an opportunity to bring over bankers and not necessarily just as a result of these changes, but more in our ability to really give them the tools to go out and make loans in particular.

So yes, that is part of our strategy and something that's really important, and it also helps to be considered one of the best places to work. That helps a lot..

Great. And then just on M&A. Obviously, you guys want to make sure you get this latest acquisition integrated, but just -- I wanted to get your updated thoughts on M&A prospects and whether or not there's more or less activity just in the last, say, 3 months..

I would say that it's been pretty consistent over the last 12 months. There's been a lot of conversation. I think that there's been a little sluggishness because of a difference between pricing from a buyer and a seller perspective. But the economy is strengthening, and that helps both sides of the equation.

But yes, I would say that it's been very consistent over the past several months, lots of talk though..

And there are no further questions in the queue..

Well, then I'd like to thank everyone for joining us today, and before we sign off, I just have one additional thing to say, and that's, go Seahawks! Thanks, Malaya..

This does conclude today's conference call. You may now disconnect..