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Edited Transcript of COLB earnings conference call or presentation 24-Oct-19 5:00pm GMT

Q3 2019 Columbia Banking System Inc Earnings Call

Tacoma Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Columbia Banking System Inc earnings conference call or presentation Thursday, October 24, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew L. McDonald

Columbia State Bank - Chief Credit Officer & Executive VP

* Chris Merrywell

Columbia Banking System, Inc. - Interim COO

* Clint E. Stein

Columbia State Bank - Executive & 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

* Gordon Reilly McGuire

Stephens Inc., Research Division - 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, Research Division - MD of Financial Services Equity Research

* 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 2019 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, 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, Mike. Good morning, everyone, and thank you for joining us on today's call as we review our third quarter 2019 and year-to-date results, which we released before the market opened this morning. The earnings release and a supplemental slide presentation are available at columbiabank.com.

I'm pleased with our third quarter results. Earnings exceeded $50 million for the second straight quarter, and on a year-to-date basis, net income was up 16% over 2018 results to $148 million.

During the third quarter, our bankers did an excellent job in focusing on those things that they can directly control. Loans were up $109 million on strong production of $383 million. Credit quality continued to strengthen and deposits expanded by $644 million, a portion of which is an increase in public funds that Greg Sigrist, our Chief Financial Officer, will discuss in his comments.

Our succession plan is a key component of sustaining our business model. And I'm happy to report that the CEO succession process now underway is going very smoothly, our employees, the investors, and a broad spectrum of other stakeholders have expressed strong support and appreciate the thoughtful continuity of leadership. Clint is a talented banker with 25 years of experience, including 14 spent growing Columbia Bank. I'm proud to pass the torch on to Clint, and I'm confident he will lead Columbia Bank successfully into the future.

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 and incoming CEO, who will review our production activity and highlight the status of some of our digital investments; Andy McDonald, our Chief Credit Officer, who will review our credit quality information; and Chris Merrywell, our incoming Chief Operating Officer. 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 filings and, in particular, our 2018 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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Thank you, Hadley.

Third quarter earnings of $50.7 million and EPS of $0.70 per diluted share was the second best quarter in our history after the second quarter of 2019. As you know, we have been working diligently since the latter half of 2017 to put protections in place to defend our NIM and net interest income should interest rates decline. As a reminder, the 3 primary interest rate risk management tools we've been using have been to increase the duration of our assets, selectively grow the balance sheet by borrowing short term to fund the purchase of securities that would respond well in a rate-down environment and a derivative strategy realizing a zero cost collar.

Since 2017, fixed-rate loans have increased from 38% to 47% of the portfolio as our derivative strategy remains in place with a $50 million notional amount. We entered the third quarter with approximately $50 million in our security strategy. We did increase our security strategy in the third quarter by selectively increasing public funds by approximately $300 million as an alternative to using FHLB advances with corresponding increase in the securities portfolio.

The decision to use public funds this quarter is in line with our contingency funding plan and a desire to periodically test some of the alternative funding sources available to us. Our security strategy now stands at approximately $800 million and along with increased loan duration and the derivative strategy will provide protection in the event of a further decline in rates.

After considering the $4.9 million of loan interest recoveries in the second quarter, net interest income did increase $2.2 million quarter-on-quarter, thanks in part -- thanks in large part to an increase in net interest-earning assets and loan growth during 2019. As you'll recall, the interest recoveries also added 17 basis points to the second quarter NIM. When we factor that in, the remaining decline in the third quarter operating NIM of 9 basis points was driven by the extra insurance we took out in the form of increasing the security strategy.

Cost of deposits did increase modestly, given our decision to selectively increase participation in public funds as part of our overall interest rate risk management strategy. If you exclude the public funds, which are hostile in nature, our cost of deposits was unchanged.

Noninterest income was $28 million for the quarter, which was up $2.4 million on a linked-quarter basis and up $7 million compared to the third quarter of 2018. While each quarter benefited from onetime items, we are seeing positive trends in loan, card and financial services revenues as we continue to focus on generating noninterest income.

Third quarter expense of $87.1 million includes $1.9 million of expense that is directly tied to our digital efforts. We remain focused on closely managing our expense run rate and anticipate noninterest expense, excluding digital, to continue in the mid-80s range.

The year-to-date impact of our digital initiatives was $5.9 million. We anticipate a full year impact of $9 million to $10 million. As we go on to the first year of the digital journey, we have focused on foundational projects that create capacity in the front and back offices, and we are on schedule to meet the 3-year strategic road map laid out a year ago. We expect a similar level of digital investment in 2020 with a full year impact in the $8 million to $10 million range.

Our effective tax rate was 19.6% for the quarter and 19.2% year-to-date, both within our target range of 19% to 20%. We actively repurchased shares during the third quarter as part of our capital strategy, and we will continue to do so, provided we feel it will benefit our shareholders. As we've shared in prior calls, we have a strong capital position, and we'll continue to balance buybacks with special dividends and strategic opportunities.

Lastly, the team has been working hard on the implementation of new current expected credit loss, or CECL, accounting standard. Based on our current portfolio and forecasted macroeconomic conditions, we estimate a day-1 impact on the allowance for credit losses, or ACL, ranging from a decrease of 10% to an increase of 5%. This reflects an indicative range from the prior 5-quarter look back we performed with forecasted macroeconomic variables contributing to quarter-on-quarter variations. No material impact to our capital levels is anticipated, [while it does continue to refine and validate our CECL models, and the ultimate impact will depend on characteristics of the loan portfolio and the macroeconomic environment at the adoption date.

At this point, I'd like to turn the call over to Clint.

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Clint E. Stein, Columbia State Bank - Executive & COO [4]

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Thank you, Greg. Good morning, everyone.

We've always focused on driving long-term value for our stakeholders. This quarter's solid performance embodies the outcomes of our long-term thinking. Our bankers continue to build relationships on both sides of the balance sheet, as evidenced by the growth in loans and deposits. We continue to evaluate how we allocate resources. The gain on the sale-leaseback transaction during the quarter is an example. In the coming years, we will reinvest a small portion of the gain into a contemporary replacement facility that better suits our needs and those of our clients. The remainder can be reallocated to growing other parts of our business.

Without the noise created by the increase in public funds, deposits still grew by approximately $344 million or 13% annualized during the quarter. As a result, the deposit mix shifted slightly from 61% business and 39% consumer.

Third quarter loan production was $383 million, exceeding $1.1 billion on a year-to-date basis. Even with this record-setting production pace, our bankers have been busy generating new leads resulting in a solid loan pipeline. Term loans comprised 65% of the production, whereas lines were 35% of the total. The quarterly production mix was 56% fixed, 39% floating and 5% variable. The overall portfolio mix is now 47% fixed, 36% floating and 17% variable.

New loan production throughout the quarter was booked at an average tax adjusted coupon rate of 4.77%, which is lower than the overall portfolio rate of 4.82%. The decline is the result of higher-yielding repayments in the construction and CRE space coupled with repricing of variable rate loans.

Prepayments of $146 million in the current quarter were stable and consistent with the prior quarter amount of $153 million. While stable on a linked-quarter basis, current prepayment activity is down about 10% from third quarter 2018.

During the quarter, C&I production was 44% or $169 million of the total production, and commercial and multifamily real estate production was 42% or $161 million of the total. C&I loans were up $63 million driven by seasonal activity in the ag book along with increases in the finance and insurance sectors.

Commercial and multifamily real estate loan totals were up $62 million during the quarter driven by increases in the warehouse, land, office space and recreational sectors.

As part of our ongoing branch rationalization process, we finalized the consolidation of 3 branches during the quarter, 2 in our Puget Sound market and 1 in our Portland region. One additional branch consolidation is underway and scheduled for completion during the fourth quarter.

We continue to advance our digital program. In the third quarter, we completed the rollout of our new commercial online banking and treasury management system, and we implemented our new human capital management platform, improving operational and talent management efficiencies across our employee base. We currently have multiple projects underway that will improve our peer-to-peer money transfer capabilities, digitized deposit account opening, enhance our small business lending capabilities and drive efficiencies through increased automation across the company. We view our digital efforts as an ongoing journey rather than a destination. The primary pillars are in place, the road map is laid out, and we are moving well down the path.

I want to take a moment to thank Hadley for his leadership, friendship and contributions to building our franchise over the past 7 years. The entire team wishes Hadley and Gayle a long and happy retirement.

Now I'll turn the call over to Andy.

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [5]

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Thanks, Clint.

In summary, credit quality is very good. NPAs to total assets were down to 27 basis points, which is the lowest level in 12 years. In addition, we continue to enjoy positive migration in both the criticized and classified loan categories. We are, however, carefully watching our clients with respect to macroeconomic conditions. If the tariff war persists, it is likely the region will experience negative economic impacts as Washington, Alaska and Oregon are among the top 7 states most affected by these tariffs on a GDP basis. We actively monitor this sector and are encouraged by recent trade developments with Japan and ongoing discussions with China. However, we did see an increase in watch-rated assets in the quarter by roughly $31 million. And this was to help us further monitor trade development impacts on our portfolio.

Our third quarter provision for loan and lease losses of $299,000 was, again, very modest and essentially unchanged from the prior quarter. The quarter benefited from a large level of recoveries in both the originated and PCI portfolios. Most of the recoveries for the quarter were related to 2 relationships dating back to the Great Recession. The dedication of our special credit team is exemplified by these recoveries. Absent these recoveries, our provision would have been more meaningful. So for the quarter, we had a provision of $1.75 million for the originated portfolio, offset by a $1.2 million release for the First Heritage portfolio and a net release of $214,000 for the Columbia River, West Coast and Pacific Continental portfolios.

As of September 30, 2019, our allowance to total loans increased by 1 basis point to 94 basis points of total loans. As always, we like to remind you that this ratio is impacted by our acquisitions and the associated loans that were recorded at fair value. Embedded in those valuations is approximately $20 million of net discount for which approximately $15 million is associated with the Pacific Continental portfolio, $3 million with the West Coast portfolio and $2 million with the Intermountain portfolio.

With that, I'll turn the call back to Hadley.

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

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Thanks, Andy.

We're pleased to announce our regular quarterly dividend of $0.28, which constitutes a payout ratio of 40% for the quarter and a dividend yield of 2.95% based on a closing price of our stock on October 23. This quarter's dividend will be paid on November 20 to shareholders of record as of the close of business on November 6, 2019.

In closing, it's been a privilege to be part of this company. I've been inspired daily by the way our employees care for each other, our customers and by their unwavering commitment to help build stronger communities.

This concludes our prepared comments this afternoon. As a reminder, Greg, Clint, Andy and Chris are here with me to answer your questions.

And now Mike will 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 is from the line of Jeff Rulis.

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

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I guess, first one is for Greg. Just to kind of get back into those expenses, your favorite topic. I think the mid-80s range, ex the digital, is what you had said and have said in the past. The $9 million to $10 million full year digital spend, what is that year-to-date?

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

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Year-to-date, I believe I said in my comments, it was $5.9 million year-to-date. And that actually did reflect almost $1 million that we were able to capitalize this quarter, which brought in the year-to-date range versus what I'd indicated last quarter.

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

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Okay. Sorry, I didn't hear that year-to-date number. Was it -- you said $5.9 million?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [5]

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Yes. It's $5.9 million, which is net of approximately $1 million we were able to capitalize. So absent the capitalization, it would have been higher.

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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. I guess for the full year, I guess Q4, we're still looking for a ramp in that spend in addition to the mid-80s guidance?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [7]

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Incremental to the mid-80s guidance, correct. I mean we're pretty far along in the year. And I think as Clint had said in his comments, a lot of the cornerstone projects are pretty far along. But I think over the balance of the year, roughly 30 projects we're going to have done. So there's still a little bit that could flip between the fourth and first quarter. But yes, there would be -- still be some incremental to the 80 -- mid-80s run rate.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [8]

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Okay. And if we took kind of that mid-80s base into '20, you talked about another $8 million to $10 million added for the additional digital spend. What kind of core expense rate could we assume on the mid-80s number, if you're comfortable discussing that?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [9]

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Give me that one more time, Jeff. So you're talking on core...

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [10]

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So yes. It -- you -- did you mention $8 million to $10 million in 2020 for additional digital spend?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [11]

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Right. I mean, I think you'd -- ex the digital spend, you'd probably expect to see 2% or 3% growth I mean something in line with rate of inflation. So I mean I -- if I were trying to model that out, I would try to peg it to the rate of inflation.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [12]

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Okay. That is helpful. I was just trying to get that number down. Other question. I guess for Andy, just trying to -- I understood that the -- these recaptures and recoveries on past transactions kind of come and go. It seems like we've seen a flurry of them the last couple of quarters. Is there anything prompting the timing of that? Or is it just kind of indeed coming in all in the last couple of quarters? Anything to read into that?

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [13]

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Yes. I mean this quarter, we had 2 significant ones. One for about $1.9 million in the originated portfolio. I guess you could classify that one as a bit of a surprise. We had a strategy in place where we were able to encumber assets and the principles finally decided to do something with those assets and that afforded us the opportunity to collect on the money. Absent them actually taking action to try to create value with the assets, we would have been still waiting for some kind of recovery.

The $1.2 million in the PCI book was actually a negotiated settlement where the individual actually came in a year ahead of what we expected and what we had agreed to. And again, it was -- they had an investment opportunity that they wanted to take advantage of. So I guess kind of a combination of a number of things, but that's how I would explain the 2 large recoveries.

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Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [14]

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Okay. And Hadley, congrats on the retirement. I think a commendable job when you stepped in at kind of a critical point in the bank's history. So congrats.

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Hadley S. Robbins, Columbia Banking System, Inc. - President, CEO & Director [15]

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Well, thank you, Jeff.

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Operator [16]

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Your 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 [17]

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And I'll extend my congratulations as well, Hadley, on your retirement and Clint on your new role as well, Chris, to you as well. The -- I guess following up on Jeff's inquiry into the expenses, I'm just trying to understand a little bit about the year-to-date versus the full year guidance. It looks like you're basically talking about a $3 million to $4 million expense that could hit in the fourth quarter, but I guess I'm expecting some amount of that, given the size of it. You must be looking to capitalize or what -- can you give us some breakdown of how that might occur?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [18]

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Yes. I mean, I think the capitalization piece is always -- it's triggered late in the process once we're able to negotiate contracts, and it's really -- it's a fallout of what's on the piece of paper. And I would say we've had better experience negotiating contracts this year than we probably planned, talked about earlier in the year. Of that $3 million to $4 million range, I am hopeful that some amount of that we could capitalize, so it could bring you down to the lower end of the range, Aaron, but there's also a piece of that, that could flip into next year. So that's why there's a bit of a range there still.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [19]

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Okay. And I'm sorry, and what was the amount of that spend that you expect for next year? And is it a similar kind of situation where some of that will end up being capitalized and so won't fully be recognized in the year?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [20]

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Yes. The range I commented on in my prepared remarks was $8 million to $10 million for next year. I -- looking at next year's projects, there's probably less opportunity to capitalize than we've been able to do in some of the, what I call, the cornerstone projects, given size and scope. But there could be some that could pull you down to the lower end of the range, Aaron. But until we really get into that, it's really hard to predict.

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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [21]

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Sure. Okay. And then looking at the margin, just given some of the balance sheet strategies that you employed during the quarter as well as just the changing rate environment, what's your expectation for the net interest margin as we head into here going into the fourth quarter and into next year?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [22]

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Yes. Well, again, absent any potential action next week from the Federal Reserve, I think you're really looking at a flat-to-down environment. Pricing continue to be very competitive. We're always going to have some quarter-on-quarter fluctuation, just given our funding mix and as deposits flow out in the first quarter. But again, absent a change next week, I think we're -- it's going to be flat to down a little bit is the way I'm thinking about it.

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Operator [23]

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Your next question comes from the line of Gordon McGuire.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [24]

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Congrats, Hadley and Clint. Greg, I just wanted to clarify, you said the full 9 basis points of operating NIM decline ex the recoveries last quarter. That was all from the security strategy?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [25]

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Yes. The security strategy did have a 9 basis point impact, Gordon. I mean there were other imbalance in the quarter, but when you factor out some of those ups and downs, it really -- you're left with those 9 basis points.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [26]

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Okay. So it held pretty flat if you back out the interest recoveries in the strategy?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [27]

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That's right.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [28]

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And then just to clarify on your last -- your comment on the last question. You said absent the -- any change? Are you just saying absent a rate cut, NIM is flat to down? Or absent a change in the projections for a rate cut?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [29]

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Absent a rate cut next week. And if you just look at where the curve is now, I would expect -- and I think the curve does factor in the cost. But if we just hold -- just take a look at the curve as it stands today and roll forward into next quarter, I would look at down to -- flat to slightly down.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [30]

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Okay. And then just the impact from the rate cut, is it still what you were talking about last quarter, just the net basis from the protection strategy? Is it still in the same range? And can you just kind of update us on...

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

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Yes. That's a good question. I mean it's fairly consistent. If we have a 25 basis point cut next week or in the future, let's say, we don't have an estimated $3 million impact over the next -- the following 12 months, and that's net of $2.5 million of protection from the interest rate risk strategies.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [32]

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Okay. And then I understand there's a lot of moving pieces to the expense base next year, but it's been a little while since you've talked on this call about the efficiency ratio in the mid-50% target. And the rate outlook changed since then, so I'm wondering if you could provide an update there.

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [33]

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Yes. Sure. I mean, as you point out, the interest rate environment does impact the efficiency ratio, and we did expect that to float up a little bit this year as we execute on the digital strategy. I think longer horizon, so later into next year and then probably into the following year, we do expect that to float back down. And we are really focused on driving the operational efficiencies, in part due to digital initiatives to help that -- make that happen. But I think the range we're in is probably the range we're going to be in for the next couple of quarters.

And if you just also kind of segue and think about the ratio of noninterest expense to average assets in the quarter, that was, I think, 2.59%, and that's really in that range we've been talking about for a while too, which is having that ratio in the 2.50% range. So that is the other metric we are keeping a close eye on as well.

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Gordon Reilly McGuire, Stephens Inc., Research Division - Research Analyst [34]

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Got it. And then just housekeeping, what was the weighted average price of the repurchases this quarter?

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

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You asked the one question I don't have in front of me. I think it was slightly over $35 a share. But the math -- once you get the 10-Q, the numbers will drop down.

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Operator [36]

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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 [37]

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Congrats to you, Hadley and Clint as well, echo those comments. On the expense outlook, mid-80s, layer on 2% inflation, the -- call it, the midpoint of the $8 million to $10 million of digital, that implies an $89 million run rate on average next year. Does that consider maybe modest, but the recent branch closings -- closures and the efficiencies that you might gain from some of these dual systems coming off next year?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [38]

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Yes. I think it does reflect both of those. What it doesn't reflect yet is we're still midstream on our budget cycle for next year, which is where we'll really start to make a lot of the decisions that foundationally could help us calibrate the number better, Matt. But I would say, at this point, it does include both of those factors.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [39]

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Okay. And then just on the loan growth outlook, I think you've conservatively guided to low single digits in the past. It looks like you're tracking to do around 5% for this year. I guess how do you feel about the growth outlook as we look into next year and you consider some of the new producers you brought onboard, whether or not that might change your outlook?

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Chris Merrywell, Columbia Banking System, Inc. - Interim COO [40]

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Yes, Matt, this is Chris. I'd say that despite a very competitive environment, we're seeing sufficient opportunities that match our credit discipline. The pipeline remains full. But we're continuing to monitor prepayment activity, which is difficult to forecast. And we stay frequently in contact with our clients to try to stay ahead of that. And so yes, we're in that range.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [41]

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Okay. And did you happen to have the loan payoffs in the quarter? I think you spoke to prepays, but not the overall payoffs.

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Clint E. Stein, Columbia State Bank - Executive & COO [42]

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Yes, Matt, this is Clint. I actually had that number in the script, and I took it out because I just consider payoffs as kind of a good thing. It's part of what we expect when we make loans, and it's the prepayments that create the variance.

Let me come back to -- I've got it in a report in here. I can follow up off-line also because it's just a report that -- we pull the prepayments from the same report so we can get you the number.

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Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [43]

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Okay. And then just last one on the interest recoveries. Last quarter, $4.9 million. For some reason, I haven't been able to find this quarter what they were.

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [44]

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Matt, this is Andy. Interest recoveries this quarter were not anything out of the norm. And so we didn't highlight. The recoveries last quarter were far and above what we normally enjoy.

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Operator [45]

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Your next question comes from the line of Jon Arfstrom.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research [46]

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A few follow-ups. Maybe, Greg, for you first. In terms of, call it, asset liability management, you talked about the collars, you talked a little bit about the securities and public fund strategy. What more do you think you need to do? Are you just satisfied where things are at today in terms of when you look at the forward curve and the rate environment? Do you feel like you're set or might we see some more changes in the next few quarters?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [47]

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It's -- Jon, honestly, it's not something we ever stop looking at. I mean we have a very active dialogue around our asset liability management and pricing on both sides of the balance sheet and, obviously, mix comes into play as well. So we're not resting on where we are. To this point, we're absolutely still intending to actively manage and protect our NIM as well as actively manage our net interest income.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research [48]

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Okay. I mean is the expectation with some of the loan growth that you guys have talked about, expectation is even with maybe some incremental margin pressure, you still feel net interest income growth is in the cards for 2020?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [49]

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It's hard to predict at this point. I mean, as I mentioned, we're still going through the budgeting process. So I'd hate to give you any leading indicators on that, Jon. But as Clint commented on, we feel comfortable with the pipeline, and it's still something that we're going to continue to work through as we get into next year.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research [50]

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Okay. Chris, for you, a follow-up on loan growth. This is like a high-class problem, but you had your second best quarter in terms of new originations. It's below what you had last year, but still a healthy number. Are you seeing any changes in the pipelines or any part of your commercial or commercial real estate where optimism around pipelines might be fading a bit? Or do you feel like this is all pretty consistent?

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Chris Merrywell, Columbia Banking System, Inc. - Interim COO [51]

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I'd say it remains pretty consistent. The pipeline is full. And again, I just mentioned, we're seeking signs of opportunities that meet our disciplined credit philosophy. So at this time, I would say it remains consistent.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research [52]

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Okay. And then last follow-up. Give us a little more details on the sale leaseback, if you can. And then what kind of potential branch consolidations there might be on the horizon coming in 2020.

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Clint E. Stein, Columbia State Bank - Executive & COO [53]

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Jon, this is Clint. The sale leaseback was a facility in the Bellevue market that, obviously, with all the growth that's happening there and the period of time that we've owned the location, it's a fairly dated branch facility and on a very valuable piece of dirt. And so as we looked at what we wanted to do not just with branch consolidations, but just the branch footprint in general because in my prepared remarks, I mentioned we'll reinvest in more contemporary location in the coming years. We've got up to 3 years or so that we can evaluate where we're going to be in that same part of town.

We've talked in the past about our neighborhood concept, and I expect that you'll see a facility like that replace this specific location. But we also have some other places within our footprint where we feel like that additional branch locations would be beneficial to serving our clients and helping our bankers generate new relationships. So that's the reinvestment component of it.

The rationalization part in the deck that we put out on our website this morning, we have what we've done in that regard over the last 10 years or so, that's ongoing. And we don't -- we've never been fans of putting a target or a number out there because we really look at how branch traffic is changing, how the different channels that customers are using, and that really drives what we see as potential additional consolidations or foreclosures.

So it's more than just simply reducing the number of branches. So you won't see a ton of new branches. I don't want you to think that we'll get a branch expansion strategy by any means, but it's a very dynamic process that we go through. Chris and I have worked in our current capacity very closely on it for several years. And I'm pretty excited to see what Chris does with it as we move forward.

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Jon Glenn Arfstrom, RBC Capital Markets, Research Division - MD of Financial Services Equity Research [54]

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Okay. Great. And to echo the comments, Hadley, congratulations; and Clint and Chris, a long runway ahead. So best of luck.

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Operator [55]

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(Operator Instructions) And the next question is from Jackie Bohlen.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [56]

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I just wanted to touch base on -- make sure I understood the comments regarding the security strategy and the positive impact that has had. And so Greg, you were saying if we were to have a rate cut next week, then that would be approximately a $3 million decline in income over 12 months, and that's net of a $2.5 million benefit from the strategies you've undertaken. Do I properly understand that?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [57]

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Yes.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [58]

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Okay. So is it fair to assume then, and I think you kind of alluded to this, that if we are to have an environment where we have continued cuts, you would actively look at the potential benefit for continuing those strategies. Is that fair?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [59]

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We would dynamically continue to reassess the entirety of the interest rate risk management strategy, that's correct.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [60]

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Okay. Okay. And then, Andy, a question for you. Just given some concerns that you're seeing from your customer base over the possible impact of tariffs and what that might do to businesses, has this changed anything within how you think about your reserve methodology, understanding, of course, that we're about to enter CECL?

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [61]

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Yes. And CECL will save us all, I guess. So that will be a wonderful thing. Well, certainly, from a qualitative standpoint, it does impact our economic outlook as we look forward. So when we are calculating our reserve, we are very cognizant of what's occurring, especially with trade wars, Brexit and other economic indicators. If you look at manufacturing over the last several quarters, it's been on a decelerating basis. So those kinds of issues are always part of our methodology when we're looking at our allowance. And then, of course, as we would see those things, if it were to materialize on the quantitative side of the model, we would ease off on those qualitative assumptions.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [62]

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Okay. And then I would assume that the introduction of CECL methodology and given a lot of the political noise that we have, that could increase volatility. Is that fair?

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Andrew L. McDonald, Columbia State Bank - Chief Credit Officer & Executive VP [63]

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Yes. I think that's a very keen observation on your part. If you just think about the economic environment in the fourth quarter of '18 to the first quarter of '19 to where we are now today, you can see quite a bit of volatility in economic data and forecast.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [64]

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Okay. And that the guidance you provided, and thank you very much for that, for a CECL range of minus 10% to up 5%, is that based on where we stand today?

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Gregory A. Sigrist, Columbia Banking System, Inc. - Executive VP & CFO [65]

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That range really does reflect the entire range Andy just talked about. So we just wrapped up a 5-quarter look back, I would say the high end of the range absolutely reflects where we are today.

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Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [66]

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Okay. Okay. And I would be remiss if I didn't echo everyone's comments, and congratulations on this management shift. And Hadley, I hope you have a lot of fun things planned.

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Hadley S. Robbins, Columbia Banking System, Inc. - President, CEO & Director [67]

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You bet I do. Thank you, Jackie.

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Operator [68]

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At this time, we have no further questions on the phone.

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Clint E. Stein, Columbia State Bank - Executive & COO [69]

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Before we conclude the call, Matt, I'll circle back on your question regarding payoffs during the quarter. It was $62 million. So prepayments of $146 million, payoffs of $62 million, it got us to our $208 million total.

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Hadley S. Robbins, Columbia Banking System, Inc. - President, CEO & Director [70]

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Okay. Thank you. And that concludes our call for the day. I appreciate it.

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Operator [71]

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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.