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Edited Transcript of COLB earnings conference call or presentation 25-Oct-18 8:00pm GMT

Q3 2018 Columbia Banking System Inc Earnings Call

Tacoma Feb 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Columbia Banking System Inc earnings conference call or presentation Thursday, October 25, 2018 at 8:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew L. McDonald

Columbia Banking System, Inc. - Executive VP & Chief Credit Officer

* Clint E. Stein

Columbia Banking System, Inc. - Executive VP & COO

* Gregory A. Sigrist

Columbia Banking System, Inc. - Executive VP & CFO

* Hadley S. Robbins

Columbia Banking System, Inc. - President, CEO & Director

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Conference Call Participants

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* Aaron James Deer

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst

* Jacquelynne Chimera Bohlen

Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research

* Jeffrey Allen Rulis

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Jon Glenn Arfstrom

RBC Capital Markets, LLC, Research Division - Analyst

* Matthew Timothy Clark

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's Third Quarter 2018 Earnings Release Conference Call. (Operator Instructions) I would now like to turn the call over to your host, Hadley Robbins, President and Chief Executive Officer of Columbia Banking System.

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Hadley S. Robbins, Columbia Banking System, Inc. - President, CEO & Director [2]

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Thank you, Elizabeth. Good afternoon, everyone, and thank you for joining us on today's call as we review our third quarter 2018 results.

The earnings release and a supplemental slide presentation are available on our website at columbiabank.com.

Third quarter was solid on many fronts and we thank all of our employees for their ongoing efforts and contributions. This was a special quarter for us because it marked our silver anniversary. Over the last 25 years, our teams have worked hard to create a distinctive Columbia Bank experience, and I believe have been very successful on doing so.

During the quarter, rising interest rates, coupled with disciplined deposit pricing and a favorable deposit mix, expanded the bank's net interest margin. We also generated record levels of loan production, however, elevated levels of repayment activity continue to create headwinds for net loan growth. Additionally, persistent efforts by our credit administration team successfully led to a meaningful reduction in non-performing assets.

As I've previously mentioned, we have been evaluating a path forward to best position the bank for the digital age. We consider it a transformative project, one that will require upfront investment in order to continue expanding sustainable revenue streams and to help us effectively scale the bank as we grow. In order to accelerate our efforts, we've engaged an outside consultant to assist us. As we finalize our thinking, we'll share the framework and important financial dimensions of the plan with you.

On the call with me today are Greg Sigrist, our Chief Financial Officer, who will provide details about our earnings performance; Clint Stein, our Chief Operating Officer, who will review our production activity; and Andy McDonald, our Chief Credit Officer, who will review our credit quality information. I will conclude by providing an update on business conditions. Following our prepared comments, we'll be happy to answer your questions.

It's important that I remind you that we'll be making forward-looking statements today, which are subject to economic and other factors. For a full discussion of the risks and uncertainties associated with the forward-looking statements, please refer to our securities filing and, in particular, our 2017 SEC Form 10-K.

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

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [3]

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Good afternoon, everyone. Earlier today, we reported third quarter earnings of $46.4 million which is $0.63 per diluted common share. Excluding pre-tax acquisition-related expenses of $1.1 million this quarter, reported EPS would have been $0.65 per share.

A key driver in the quarter was the strength of our net interest income. Our operating net interest margin was 4.38% for the third quarter and this was a linked quarter increase of 11 basis points.

On a tax equivalent basis, the yield on earning assets was up 15 basis points in the quarter. On the deposit side, we did see some nice growth and a bit of mix shift during the quarter as non-interest bearing deposits increased to nearly 50% of total deposits and our proportion of non-interest bearing deposits is obviously a structural benefit for the bank.

For interest-bearing deposits, pricing continues to be adjusted on a disciplined basis. Selected money market rate adjustments early in the quarter increased the cost of interest-bearing deposits by 5 basis points to 24 basis points, however, we do see competitive pressures building, but we continue to actively manage our deposit base and are closely monitoring market dynamics.

As expected, we did see a $2.5 million impact from the application of the Durbin amendment on July 1. Absent this impact, non-interest income remained fairly flat for the prior quarter. We remain committed to growing non-interest income in our other business lines to help offset the reduced interchange revenue.

As mentioned earlier, acquisition-related costs in the quarter were $1.1 million, which compares to $2.8 million in the prior quarter. Transition and retention agreements were responsible for most of these costs. Essentially all of the acquisition-related costs have now been incurred, with only a small amount remaining for the fourth quarter.

As we mentioned last quarter, we are seeing the benefits of the Pacific Continental integration come through our expense run rate, most notably in compensation and benefits, as well as occupancy expenses. We will continue to look for additional operational efficiencies as we move forward.

After removing the effect of acquisition-related costs, our core non-interest expense was flat on a linked quarter basis. Our operating efficiency ratio continues to trim down in the third quarter to 54.8% as compared to 56% in the prior quarter. Our long-term target is to remain in the mid-50s range. Our effective tax rate of 19.7% for the third quarter is in the range we would expect for a full year, which is 19% to 20%.

At this point, I would like to turn the call over to Clint to talk about our production activity.

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Clint E. Stein, Columbia Banking System, Inc. - Executive VP & COO [4]

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Thanks, Greg. Good afternoon, everyone. Our bankers had a very busy quarter, successfully earning new business and deepening existing relationships on both sides of the balance sheet. We took a total team effort, which is reflected in our third quarter and year-to-date results.

Deposits grew $220 million, or over 8% annualized during the quarter. The seasonal trends we have experienced in prior years continue to play out in 2018 with the third quarter typically being strong for deposit growth.

As Greg mentioned, our deposit base has a structural benefit with roughly half in non-interest bearing accounts. This benefit has enabled us to maintain a low overall deposit beta, despite some of the re-pricing activity that occurred during the quarter.

Our cost of deposits of 12 basis points during the quarter was just 2 basis points higher than the prior quarter.

Quarterly average tax adjusted coupon rate for new loan production was 5.14% compared to a portfolio rate of 4.87%. The portfolio coupon rate increased 5 basis points during the quarter.

The production mix was 44% fixed, 48% floating, and 6% variable. The overall portfolio mix is now 44% fixed, 32% floating, and 24% variable. Loan production in the third quarter was $409 million, which is an increase of $154 million, or about 60% from the third quarter of 2017. And as Hadley mentioned, a record for quarterly production.

Our seasonal decline in line utilization started a little earlier than typical. At the end of the third quarter, line balances were down roughly $97 million from the prior quarter as the utilization rate declined from 52.5% to 50.8%.

Pipelines remain to our satisfaction and give us confidence in the continuation of our production opportunities. However, prepayments continue to negatively impact net loan growth. 2018 year-to-date prepayment activity is up $330 million or 70% from the same period in the prior year. We did see this trend moderate in the third quarter as prepayment activity of $279 million was about $25 million or 8% lower than the prior quarter. However, when thinking about how to adjust your models predicting when prepayment activity will revert back to historical levels remains a challenge in the near term.

Roughly half of the new production in the quarter was in C&I, while commercial real estate loans accounted for 29% of the production. The CRE production was mostly absorbed by activity within this sector as linked quarter balances were essentially unchanged. However, there was some migration between buckets with construction balances declining $39 million and perm balances increasing by $29 million. Term loans accounted for roughly $276 million of total production, while new lines represented the remaining $133 million. The mix of new production remained granular in size with 23% in loans over $5 million, 31% in the range of $1 million to $5 million, and 46% under $1 million.

In terms of geography, 56% of new production was generated in Washington, 27% in Oregon, 5% in Idaho and 12% in other states. Our production in other states has grown as a result of our national health care group that came to us as part of the Pacific Continental acquisition.

As I mentioned at the beginning of my prepared remarks, our performance for the quarter required a total team effort. We could not have achieved our production and growth results without the hard work of our team members in the back office areas, such as loan and deposit operations and credit administration.

Now I'll turn the call over to Andy to review our credit performance.

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Andrew L. McDonald, Columbia Banking System, Inc. - Executive VP & Chief Credit Officer [5]

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Thank, Cliff. Our third quarter provision for loan and lease losses of $3.2 million, compared favorably to the $4 million in the prior quarter. This included provisions of $4.5 million for the originated portfolio and $75,000 for the Intermountain portfolio.

Offsetting these provisions were releases from Pacific Continental and West Coast of $600,000 and $280,000 respectively. And a release of $502,000 from the PCI portfolio.

The provision in the originated portfolio was primarily driven by new loan balances, followed by impairments and some modest negative migration. The portfolios where releases occurred were driven by net recoveries and, of course, the liquidating nature of those portfolios.

As of September 30, our allowance for loans was 0.98% as compared to 0.95% last quarter. And it was 0.91% as of December 31, 2017. This ratio is impacted by our acquisition and the associated loans that were recorded at fair value. Embedded in those valuations is approximately $28 million of discount, for which approximately $20 million is associated with the Pacific Continental portfolio.

For the quarter, non-performing assets decreased $8.8 million, due primarily to a $9.2 million decline in non-accrual loans. All-in, non-performing assets to total assets decreased to 52 basis points, down from 61 basis points last quarter.

In summary, it was a good quarter. Past dues were 32 basis points, NPAs were down, as discussed. We enjoyed net recovery and our impaired asset to capital ratio of 17% compares favorably to 21% as of the prior year-end.

Hadley?

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Hadley S. Robbins, Columbia Banking System, Inc. - President, CEO & Director [6]

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Okay. Thanks, Andy. The Pacific Northwest economy remains robust and continues to grow faster than the rest of the nation, largely due to broad industry diversification, our proximity to the Asian markets and the strong population growth. Favorable economic conditions continue to look sustainable for the near-term, although labor markets remain tight. We see tight labor conditions across a number of industry segments affecting the pace of growth and putting upward pressure on labor costs.

Chinese tariffs area also a concern for growth. Regionally industry segments that are most exposed include aircraft, agriculture and electronics. At this point, broad-based negative economic impacts associated with tariffs are not evident, however, business owners remain concerned.

Shifting back to the communities we serve, we're pleased to have announced our 25th Anniversary Community Giving Campaign. We created a campaign to commemorate 25 years of serving our clients and communities. We're donating $25,000 to 4 non-profit organizations nominated and selected by employees and customers to show our appreciation for their efforts in making a positive difference in communities across the Northwest.

Earlier today, we announced a regular dividend of $0.26 per common share and a special dividend of $0.14 per share, which together constitute a payout ratio of 63% for the quarter and a dividend yield of 4.82% based on the closing price of our stock on October 24, 2018.

With the Pacific Continental integration largely behind us, the full earnings power of the combined companies will continue to generate capital in excess of our requirements for organic growth. Similar to prior years, we'll utilize a special dividend as one of our capital management tools and we'll evaluate future dividends on a case-by-case basis.

This quarter's dividend will be paid on November 21, 2018, to shareholders of record as of the close of business on November 7, 2018.

This concludes our prepared comments this afternoon. And as a reminder, Greg, Glen and Andy are here with me to answer your questions. And now, Elizabeth, we'll open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of

Jeff Rulis, your line is now open.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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First question, maybe for Andy. Just looking at the comments in the release about kind of a results not indicative of the long run credit profile. Do we read that as more of a long-term cautiousness or I guess what I'm getting at is it seems like your credit trends have cured from some one-off issues of the last few quarters and settling in. I guess those comments -- is that anything indicative of anything forthcoming that you're seeing in the short term?

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Andrew L. McDonald, Columbia Banking System, Inc. - Executive VP & Chief Credit Officer [3]

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Well, I think, one, the net recovery position's a really fun one to be in, but I don't believe that we're going to be in that position. We get one of those quarters every now and then, but it's not something that is consistent. And that obviously helped the provision this quarter, so I'm really trying to just help you with the ideas and thoughts around what you would be modeling from a provision standpoint. It's not that I have any particular concerns on an industry or a portfolio segment.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Got it. Okay. And then the negative migration that you did see, what sector? Was it pretty mixed or was there anything particular that was migrating you spoke of?

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Andrew L. McDonald, Columbia Banking System, Inc. - Executive VP & Chief Credit Officer [5]

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Yes, it was primarily in wholesalers and distributors and it was not in any particular industry. One was oil related, so you kind of think like gosh, oil's kind of rebounding now. And it wasn't anything unique, but that's kind of what impacted Intermountain.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Got it. Okay. And one last one. Just switching gears on the deposit growth, that mix being somewhat favorable. Is that something that you all are seeing on the customer change or is that something that you're driving some change within the staff to kind of seek out a better mix?

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Hadley S. Robbins, Columbia Banking System, Inc. - President, CEO & Director [7]

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I don't think it's anything that's intentional on our part to shift the mix. If you go back and look at the mix in the third quarter of 2017, I think it's within a tenth of a percent of what our mix was at the end of the third quarter this year. And that's both one period is pre-Pacific Continental, the other one's post. So I think some of it is just our customer base in general, our percentage of commercial accounts is nearly 60%. And then I think the other side of it is it appears that we're seeing this with a lot of our peers as well. They're experiencing some growth in this area.

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Operator [8]

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Next question comes from the line of Jackie Bohlen.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [9]

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Clint, I missed the yield on new production. Did you say it was $514 million?

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Clint E. Stein, Columbia Banking System, Inc. - Executive VP & COO [10]

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That's correct.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [11]

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Okay. Just want to make sure I wrote it down correctly. Looking at deposit and treasury management fees, that was steady over the past 2 quarters, and then it picked up nicely on the third quarter. Was there anything unusual that drove that?

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Clint E. Stein, Columbia Banking System, Inc. - Executive VP & COO [12]

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I think with our reciprocal deposits there is a bit of uptick that just flows with that, but there is some offset down in non-interest expense as well, Jackie, because it's, again, it's part of the reciprocal arrangement. Beyond that, I'm not really thinking there's anything else I'd pull forward.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [13]

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Okay. So that line item and then the reciprocal expense, those will probably just fluctuate a bit going forward?

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Clint E. Stein, Columbia Banking System, Inc. - Executive VP & COO [14]

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Yes, and they do offset.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [15]

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Okay. And then turning -- sorry, I'm shifting around quite a bit, aren't I? Looking at -- you've had higher prepayments. I know you said that it mitigated some from the second quarter. Are you seeing an impact in the deposit growth from some of these prepayments? Meaning that as customers are maybe selling properties and businesses, are they then turning around and putting them in their deposit accounts?

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Clint E. Stein, Columbia Banking System, Inc. - Executive VP & COO [16]

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That's always our objective is that as our clients move through their different points of their life cycle to have the right set of products available for them and when loans pay off and businesses sell, we always strive to move them into our wealth management group or deepen the relationship that we may already have. We have seen some of that. We've seen some of it even in terms of where we didn't necessarily have the lending relationship, but when the business sold we were very compelling on what we could do from a wealth management perspective and we've won some new relationships in that manner as well. But it's just on the deposit side. So it's a combination of all of those factors I think.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [17]

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So providing a little bit of a benefit to fees as well then through the wealth management?

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Clint E. Stein, Columbia Banking System, Inc. - Executive VP & COO [18]

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Yes. I mean, that's a long-term march and we see our assets under management in the wealth management side as well as our trust company continues to make progress and grow and year after year, we're satisfied with what we're seeing there. And long-term, yes, it should translate into some additional opportunities for us.

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Operator [19]

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Next question comes from the line of Aaron Deer.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [20]

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Hadley and Clint, I think you both mentioned that pay downs were a bit of a headwind again this quarter. Can you talk about what's really driving that in terms of -- is it other banks or is it other types of lenders that are causing re-fi's? Or is it similar to maybe what you were just describing where more customers are toward the top of the real estate cycle and selling properties and that sort of activity?

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Hadley S. Robbins, Columbia Banking System, Inc. - President, CEO & Director [21]

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There's some variability in terms of the forces that are driving that, based on the different parts of our geography. So specifically when we think about Eastern Washington, Eastern Oregon, Northern Idaho, there's still some pretty intense pressure from credit unions. They're aggressive in terms of lack of structure, pricing. They have a pricing advantage, there's no denying that. But it's really the lack of guarantees, lending deeper into the collateral value, higher, I guess higher gross loan proceeds. When we're in the -- and we're also seeing actually some private equity activity in parts of those markets. And we're seeing that in our metro markets as well. So we're seeing additional lenders, increased competition from credit unions. One of the comments I got back from one of our key market leaders on the commercial side that I almost found humorous, but it's really the state of the competitive nature or competitive environment that we're in. And it was in reference to a rather large competitor that's more of a super regional, I won't mention anything beyond that. But the comment was are they even regulated? And so that's the kind of stuff that we're seeing and it creates pressure. And then there's also the demographic part of it, where we're pretty deep into this economic run. I think people have rebuilt their businesses and everything coming out of the downturn. So we're seeing some of those folks that are ready to retire and so they're selling. Some of it's just cash sales as well, so it's not necessarily going to a different lender. And then there's always just certain times where we may want to be at a certain price for a deal that makes sense for us and if we can't get our pricing terms, then we're okay with it going to another lender.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [22]

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And that actually leads well to my next question. I was on a conference call with a CEO of another company in a different market that also has a similarly attractive deposit base. And he was commenting that with deposit rates having gone up quite a bit over the past year or 2 that the competition in the market is finally starting to realize that varied spreads are getting pinched and being forced to really raise their lending rates. And that's now giving him an advantage to undercut some of those other lenders, given his higher quality deposit base. You guys also have just a really impressively low-cost funding base, so are you now thinking about it in those terms where you can come in and with a little better pricing and win more deals? And how does that play into your outlook?

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Clint E. Stein, Columbia Banking System, Inc. - Executive VP & COO [23]

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We always want to make sure that we're getting an appropriate return for the risk that we believe is in any transaction. But we also maintain, and I think this is the point you're getting at, is that the composition of our balance sheet, and specifically our funding base, gives us the advantage that we can compete on price if it's a great deal. And we've done that and we have done some of that for either to retain key relationships or to gain new relationships in the market that are very attractive to us. But what we won't give on are the terms and so that's always the challenge. Going back to my prior comment on the large bank, we had a deal we lost and this was a long-standing account of ours. It's about a $15 million relationship. But that bank gave on some of the financial reporting and valuation requirements that we weren't willing to be flexible on. And so that's where Hadley looks at it and says you've got to look yourself in the mirror and take a deep breath and make sure you're making the right long-term decision. And it's tough because it does impact current period outstandings, but in the long run it's served us well over the 25-year history that we've maintained that discipline.

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Operator [24]

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The next question comes from the line of Jon Arfstrom.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [25]

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Question for you on your deposit costs. You had a much better performance relative to a lot of your peers and the chart you put out on Slide 7 on your presentation, it shows that you kind of track with peers, but you're able to lag. But I look at history, and you've really increased your non-interest bearing percentage of deposits. So I guess the question is how much pressure is there really on deposit costs in the near-term? Is there a risk that you have to do a catch-up type quarter, or is this really just kind of a gradual pressure? If that makes sense.

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [26]

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I think we're looking at this more as a gradual pressure. We obviously maintain our disciplines over time and I think as you kind of go back in time too that proportion of non-interest bearing's also been a factor of some of the acquisitions we've done, which changes some of the mix. But as I kind of look ahead, given the structural benefits we've got, we continue to lag, we continue to be pretty rational. And as I kind of think about if you model things out, whatever you think the market betas are going to be as we kind of roll through this rate environment, it seems to me we're probably going to be 50 -- half to 2/3 of the beta that you might see for someone with less of that sort of a structural benefit. So I think we're going to continue to be in line with market, but kind of a bit slower and in a bit of a large trajectory.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [27]

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Okay. Good. And then you guys go through the fixed floating variable piece. And I'm just curious something like the September rate increase, how much of that do you think is reflected in your earning asset yields today? And how long does that take to work its way through?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [28]

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I'll start and maybe Clint can jump in if he thinks I go astray on this. But we've got, I think once we've gone through some of the new production pieces. We've got, I think it's roughly 80% of our floating -- let me actually pull our real numbers. About 80% of our floating I think is going to adjust in the fourth quarter. It adjusts pretty quickly. But we've got about 20% of our floating in variable that it really is just coming off the floors, so I think longer term you're going to continue to see some uplift off that piece, if that gives you the color you're looking for. Clint, you have anything to add?

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Clint E. Stein, Columbia Banking System, Inc. - Executive VP & COO [29]

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The only thing I'd add is probably very little of that benefit from the September rate hike is in the current quarter numbers. What you're seeing flow through would have been what we received in June. So there should be some additional room to run, the wildcard being deposit betas.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [30]

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Okay. Good. And then just a couple more here. You talked about line utilization coming down a little bit earlier, maybe some moderation in payoffs. I think you guys typically have some seasonality in Q4 and Q1. And then you throw Pacific Continental in there as well, which may not have the same seasonality, so how are you thinking about loan balances or how do you want us to think about loan balances in the coming quarter?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [31]

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That's a difficult question, just because of the unknown about the prepayments. My prepared remarks, we're really pleased with the pipeline and the things that we can control look very promising. The typical headwinds that we have would be the seasonality in line utilization. What we saw in the third quarter was more related to our finance company portfolio and things outside of the ag book. We'll see the ag book activity – pay down activity in the fourth quarter. I guess I would just look at kind of our run rate over the last several quarters, and we think if you look long term, it's a low single-digit growth rate. And I say long term, if you take a period of 4 quarters or so, from quarter-to-quarter, it could pop up. Fourth quarter typically we get people that -- customers that are doing things around year-end and that can create a bump. But then first quarter same slowdown.

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Operator [32]

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(Operator Instructions) Your next question comes from the line of Matthew Clark.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [33]

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Can you speak to your kind of tech reinvestment systems, reinvestment plans for the upcoming year. It sounds like you're planning something, but just want to get a sense for kind of what might be built into the kind of run rate or if there's something we should be thinking about in terms of a step up. Or should we think of it from an expense to asset ratio perspective? I just want to get that related outlook.

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Hadley S. Robbins, Columbia Banking System, Inc. - President, CEO & Director [34]

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Well, Matt, really let me just speak a little bit in a general way. The project that we're talking about is really one that takes a comprehensive look at the coming quarters if you will. And it starts first with having a very clear eye view of the expectations of our customer and it looks at the internal connections required to align the activities, which will all be pointed at creating the desired customer experience. So the project will touch products, processes, systems, data, how we work together within the bank. And it's a foundational project that we think at least the first phase is about 3 years. We're in the assessment phase right now. And I'll probably be in a position to provide a bit more color next year, but as far as run rate goes, we have some CapEx that's planned, that is already part of our budgeting process and we'll have those expenses flow through. I think that the technology slide, which was 13 reflects some of the projects that we've had on our road map. And I've already kind of pulled it into our capital planning. And Greg, do you have anything to add?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [35]

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Maybe as I said in my prepared remarks, I mean, I think our long-term goal on our operating efficiency ratio is to stay in the mid-50s. I think to Hadley's point that this is a multi-year journey. And it's not just about the expense out the door. I mean this is really about enabling our client-facing teams to really have the right interactions with clients and the client experience. So I also think we're going to be over that horizon looking at what it does to really driving our client value as well. So I think to Hadley's point, we'll be in a position as we kind of roll through time to give you some better dimensions around it, but I think it's a positive story and something we're really looking forward to.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [36]

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Okay, great. And then just on the reserve ratio, reserve to loans up, I think, 4 basis points. You mentioned a little bit of migration, but can you, maybe Andy, can you talk to what drove that increase in the reserve ratio? Was there something going on in credit class 5 that we can't see or was it just renewals from acquired loans that you had to set something aside for?

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Andrew L. McDonald, Columbia Banking System, Inc. - Executive VP & Chief Credit Officer [37]

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Yes. So in the originated portfolio, you have about $242 million of growth. And part of that growth is loans that are migrating out of the discounted and PCI portfolio -- out of the discounted portfolios into the originated. So they no longer enjoy the benefit of any kind of discount because that's been totally accretive into income. And so there's a big difference in terms of the amount for the same -- basically the loan that you had before that you're simply renewing from period to period. And so, for example, the Intermountain portfolio with the discounts has a 40 basis point allowance. So when you move out of the Intermountain portfolio into the originated, which is a little over 1%, the same loan all of a sudden will draw more because there's no more discount to help benefit the allowance position. So it was a lot of growth there. Secondly, we had about $1 million in impairments and then the migration was really the third factor and only really accounted for about $500,000 of the provision.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [38]

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So should we assume that, that 74 basis points just migrates toward the 1% or maybe the 1% comes down a little bit over time? Is that the right way to think about it?

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Andrew L. McDonald, Columbia Banking System, Inc. - Executive VP & Chief Credit Officer [39]

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Well, as they migrate out of the lower percentages, it's going to drive the overall percentage up.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [40]

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Yes, I got it. Okay. And then maybe, Hadley, just your updated thoughts on the M&A landscape, what your appetite might be, what you're seeing of late.

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Hadley S. Robbins, Columbia Banking System, Inc. - President, CEO & Director [41]

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Yes. I haven't talked to anybody just recently with all of the movement in stock values, but M&A continues to be a vital part of our strategy and the way we look forward. And that for us it's something that we're always engaged in and have conversations routinely. At this point though it's pretty quiet.

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Operator [42]

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There are no further questions at this time. Please continue, presenters.

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Hadley S. Robbins, Columbia Banking System, Inc. - President, CEO & Director [43]

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Okay. Thank you, everyone.

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Operator [44]

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Thanks to all our participants for joining us today. We hope you found this webcast presentation informative. This concludes our webcast, and you may now disconnect. Have a good day.