U.S. Markets closed

Edited Transcript of COLB earnings conference call or presentation 27-Apr-17 8:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Columbia Banking System Inc Earnings Call

Tacoma May 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Columbia Banking System Inc earnings conference call or presentation Thursday, April 27, 2017 at 8:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew L. McDonald

Columbia Banking System, Inc. - Chief Credit Officer, EVP, Chief Credit Officer of Columbia Bank and EVP of Columbia Bank

* Clint E. Stein

Columbia Banking System, Inc. - CFO, EVP, CFO of Columbia Bank and EVP of Columbia Bank

* Hadley S. Robbins

Columbia Banking System, Inc. - Interim CEO, COO, EVP, Interim CEO of Columbia State Bank, COO of Columbia Bank and EVP of Columbia Bank

================================================================================

Conference Call Participants

================================================================================

* 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 - SVP and Senior Research Analyst

* Jon G. Arfstrom

RBC Capital Markets, LLC, Research Division - Analyst

* Matthew Timothy Clark

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking System First Quarter 2017 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, Interim Chief Executive Officer.

--------------------------------------------------------------------------------

Hadley S. Robbins, Columbia Banking System, Inc. - Interim CEO, COO, EVP, Interim CEO of Columbia State Bank, COO of Columbia Bank and EVP of Columbia Bank [2]

--------------------------------------------------------------------------------

Thank you, Quenisha. Good afternoon, everyone, and thank you for joining us on our call today for discussing our first quarter 2017 results. The release is available via our website at columbiabank.com.

First, I want to take this opportunity to express my gratitude for each of our employees and our management team who demonstrated tremendous commitment and support in response to the sudden loss of our esteemed leader, Melanie Dressel, who passed away in February. It's our honor to continue working together as a team to fulfill our vision of building the premier community banking franchise in the Northwest.

In accordance with our succession plan, the Board of Directors has asked me to step in as Interim CEO while a replacement search is being conducted.

During the first quarter, we achieved record net income of $29 million and diluted earnings per share of $0.50, which is $0.13 higher than the same quarter last year. This is the 14th consecutive quarter our bankers have achieved well over $200 million in new loan originations. During the first quarter, our bankers achieved loan production of $252 million while maintaining excellent credit quality. This follows record annual loan production of $1.3 billion for 2016. Deposits increased slightly by $29 million this quarter to $8.09 billion after having increased by over 8% during 2016.

We have submitted our regulatory application for the merger of Pacific Continental Corporation into Columbia and filed with the SEC a registration statement on Form S-4 that includes a joint proxy statement of Columbia and Pacific Continental and a prospectus of Columbia as well as other relevant documents concerning the proposed transaction. Upon regulatory approval, we are anticipating closing the merger transaction in June or July this year followed by a system conversion in September. We're pleased with our progress to date. Market leaders are fully engaged, and integration activities are on schedule.

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

It is 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 2016 SEC Form 10-K.

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

--------------------------------------------------------------------------------

Clint E. Stein, Columbia Banking System, Inc. - CFO, EVP, CFO of Columbia Bank and EVP of Columbia Bank [3]

--------------------------------------------------------------------------------

Good afternoon, everyone.

Earlier today, we reported record first quarter earnings of $29.2 million or $0.50 per diluted common share. There was some noise in our numbers created by our pending acquisition of Pacific Continental Corporation, accelerated vesting in Melanie's restricted stock, bank-owned life insurance proceeds and a release of the remaining mortgage repurchase reserve we established in conjunction with our 2013 acquisition of West Coast Bancorp. These income and expense items create linked quarter comparative challenges, but the aggregate impact was that they essentially canceled each other out and didn't affect our reported EPS.

Also, during the quarter, we implemented the new accounting guidance for stock compensation, which reduced our effective tax rate and improved EPS by $0.02.

Our reported net interest income of $86.7 million was an increase of $938,000 from the prior quarter. The linked quarter change was primarily driven by higher yields on taxable securities due to a market-driven reduction in premium amortization.

Noninterest income of $24.9 million in the current quarter was an increase of $2.5 million over the prior quarter. The increase was driven by a $1.5 million bank-owned life insurance benefit as well as a $573,000 benefit from the aforementioned mortgage repurchase liability.

Reported noninterest expense was $69 million for the first quarter, an increase of $4 million from the prior quarter. After removing the effect of OREO activity, FDIC claw back liability expense and acquisition-related expense, our noninterest expense run rate for the first quarter was $67.5 million. This is a $3.4 million increase from $64.1 million on the same basis during the prior quarter. The main driver of higher noninterest expense was increased compensation and benefits as well as other noninterest expense.

The $2.6 million linked quarter increase in compensation and benefits expense was comprised of $834,000 related to the accelerated vesting of Melanie's restricted stock awards and $1.9 million of additional expense for items such as the annual reset of thresholds for payroll taxes and 401(k) matching contributions, taxes associated with the payment of annual bonuses and an extra pay period during the quarter.

Other noninterest expense was up $1.2 million from the prior quarter due to an $850,000 provision to the off balance sheet liability reserve in the current quarter versus a release of $200,000 in the prior quarter.

Excluding OREO activity, FDIC claw back liability expense and acquisition-related expense, our noninterest expense to average asset ratio of 2.85% was at the higher end of the range that we have discussed over the past several quarters. In the near term, we believe, for modeling purposes, an expense ratio in the mid-2.7% range is still reasonable.

The operating net interest margin increased 10 basis points to 4.09% during the quarter as a result of higher yields on taxable securities and lower levels of overnight funds.

Our effective tax rate for the first quarter was 26.6% compared to 28.6% in the prior quarter and 30% for the full year 2016. The primary reason for the decrease is the adoption of ASU 2016-09. Excluding that impact, the effective tax rate would have been 29.84%. As such, we continue to believe a reasonable assumption for the effective tax rate is roughly 30%.

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

--------------------------------------------------------------------------------

Andrew L. McDonald, Columbia Banking System, Inc. - Chief Credit Officer, EVP, Chief Credit Officer of Columbia Bank and EVP of Columbia Bank [4]

--------------------------------------------------------------------------------

Thanks, Clint.

For the quarter ended March 31, the bank made a provision for loan losses of $2.8 million. This was primarily driven by the originated portfolio, which had a provision of $2.7 million. The discounted portfolio collectively required a provision for the first quarter of $450,000. Negative migration and loss rates drove this provision, along with $1 million in net charge-offs that were outside of the PCI portfolio.

Credit metrics continued to move favorably in the PCI portfolio, so despite $795,000 in net charge-offs, we were still able to release $325,000 from the provision for PCI loans. So net-net, a provision of $2.8 million was made for the quarter.

As of March 31, 2017, our allowance to total loans was 1.14%, essentially unchanged compared to 1.13% as of December 31, 2016.

As we have discussed previously, the area of the portfolio exhibiting the most stress is the agricultural segment, which has been impacted by low commodity prices the past few years. For example, cattle prices hit a 5-year low in October of 2016. Fortunately, they have rebounded in 2017 and are now up 27% from their lows. Nevertheless, the journey to the 5-year bottom was not kind to many cattlemen.

Wheat is another example where commodity prices have hovered around the breakeven level for most farmers for several years now. Fortunately, not all of our agricultural portfolio is in these commodities. And tree fruits and hops have continued to enjoy solid revenue growth with a positive outlook for 2017. The same can be said for the nursery and tree production industries.

For the quarter, nonperforming assets decreased $3.7 million, thanks to modest declines in nonaccrual loans of around $2.2 million and a decline in OREO of around $1.5 million. The nonperforming assets to total assets ratio decreased to 32 basis points from the already modest 35 basis points at the prior quarter-end.

In summary, the portfolio behaved well this past quarter as evidenced by net charge-offs amounting to only 11 basis points of net loans. Past dues were 16 basis points. And as discussed just a moment ago, we were able to enjoy a modest decline in NPAs as well.

I will now turn the call back to Hadley.

--------------------------------------------------------------------------------

Hadley S. Robbins, Columbia Banking System, Inc. - Interim CEO, COO, EVP, Interim CEO of Columbia State Bank, COO of Columbia Bank and EVP of Columbia Bank [5]

--------------------------------------------------------------------------------

Thanks, Andy.

Total deposits at March 31, 2017, were $8.09 billion, an increase of about $29 million from December 31, 2016. $14 million of this increase was in noninterest-bearing DDA. Savings grew the most at $35 million or 4.9%. At quarter-end, core deposits were $7.79 billion, holding steady at 96% of total deposits. The average rate on interest-bearing deposits was 8 basis points, similar to the previous quarter. The average rate on total deposits remain unchanged for the quarter of 4 basis points.

Loans were $6.3 billion at March 31, 2017, representing a net increase of $15 million over December 31, 2016. Loan production for the quarter was $252 million, which is similar to the level of production for the first quarter of 2016. [Payoff] activity was also lower than the prior quarter, which helped contribute to the net increase in loans.

Line utilization continued to decline from 50.4% at December 31 to 49.1% at March 31. Line activity in our C&I portfolio was typically soft in the first quarter, which reflects seasonal borrowing patterns of a few industries in our portfolio, most notably agriculture. Assuming historical patterns hold, we are likely to see line utilization increase in the second quarter.

New production for the first quarter was predominantly centered in C&I and commercial, real estate and construction loans. Term loans accounted for roughly $178 million of total new production, while new lines represented about $74 million. The mix in new production was more granular in terms of size compared to the prior quarter. 7% of new production was over $5 million, 32% was in the range of $1 million to $5 million, and 61% was under $1 million. In terms of geography, 54% of new production was generated in Washington, 42% was generated in Oregon, and 4% in Idaho and a few other states.

C&I loans ended the quarter at $2.6 billion, up about $8 million from the previous quarter. New production, payoffs and line utilization were all lower than the previous quarter. Industry segments with the highest loan growth in the first quarter include wholesalers, medical and construction. Industry segments with the most significant declines include agriculture, finance and insurance and transportation.

Commercial real estate and construction loans ended the quarter at $2.9 billion, up $27 million from the prior quarter or 9 basis points. The mix of asset types was well diversified. The largest increase is by asset type (inaudible) to manufacturing, farmland and office.

The quarterly average tax adjusted coupon rate for new production was 4.56% and exceeded the portfolio rate of 4.42%. The uptick in coupon rates for new production is due to the combination of mix -- we originated more fixed-rate loans at higher rates during the quarter -- and better spreads. The increase in the average portfolio coupon rate is largely related to repricing that has occurred subsequent to the December change in the fed funds rate and the postelection increase in interest rates. The fed fund move in March was too late in the quarter, so it didn't materially impact performance of the portfolio.

In looking forward, we continue to believe the Northwest will continue to grow faster than the national economy during 2017 but at a lower rate of growth as compared to previous year. Overall, business confidence continues to be optimistic. However, business owners appear to be hesitant about committing resources or taking on additional debt to fund expansion plans. Most are looking for more certainty regarding Trump administration policy changes. Business leaders have also noted that one of their emerging concerns for the region is tightening labor supply accompanied by upward pressure on wages. Farmers, in particular, found it progressively more difficult to find workers and are worried about stepped-up enforcement of existing immigration laws.

The bank's pipeline at the end of first quarter was light relative to our growth expectations. However, deal flow is accelerating and pipeline opportunities are building. New loans, coupled with seasonal line utilization, should help create positive net loan growth in the second quarter.

In closing, our quarterly dividend of $0.22 per common share will be paid on May 24, 2017, to shareholders of record as of the close of business on May 10, 2017. The dividend constitutes a payout ratio of 44% for the quarter and a dividend yield of 2.16% based on the closing price of our stock on April 26, 2017.

This concludes our prepared remarks this afternoon. As a reminder, Clint Stein and Andy McDonald are with me to answer your questions. And now, Quenisha, please open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from the line of Jeff Rulis.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Just a question on the, I guess, deposit costs and loan yields, essentially flat quarter-to-quarter. I guess, just given -- maybe an update on the competition you're seeing on both ends. And, Clint, maybe just kind of true that up with kind of a core margin kind of expectations as we roll through the year.

--------------------------------------------------------------------------------

Hadley S. Robbins, Columbia Banking System, Inc. - Interim CEO, COO, EVP, Interim CEO of Columbia State Bank, COO of Columbia Bank and EVP of Columbia Bank [3]

--------------------------------------------------------------------------------

Well, to date on the deposit side, we're seeing selective changes in product pricing amongst competitors but nothing that is suggestive of a major move in deposit pricing. It's probably testing the market. With regard to loans, in the current quarter, we were able to demonstrate an increase in our coupon rates, largely due to mix favoring the longer term. But we are seeing a fair amount of price competition for middle market-sized clients and expect that to continue as it has been.

--------------------------------------------------------------------------------

Clint E. Stein, Columbia Banking System, Inc. - CFO, EVP, CFO of Columbia Bank and EVP of Columbia Bank [4]

--------------------------------------------------------------------------------

And I'll just add to that, Jeff, that when we look at the loan yields, because there's fees that get calculated into that, we also view the change in the tax adjusted coupons, and that continues to trend up. It's been up about 5 basis points for each of the last 2 quarters, and Hadley mentioned the increase in new production, and we are seeing some better spreads there for the deals that we want. We're still seeing some things that just are priced too thin for our liking.

And so I guess, to the second part of your question on the outlook for the NIM, we're getting higher reinvestment rates in the portfolio, the investment portfolio. We're seeing a positive traction in terms of the coupons, which will translate into better yields in the loan portfolio as well. For me, I think that it's still -- the wildcard is: what happens with deposit growth? It's been very, very strong the past 2 years, and that's put pressure on the margin because it shifted our mix a little more towards the investment portfolio, but it has also helped net interest income. We look at that on a year-over-year basis. We've seen some significant improvement in that. I -- all things being equal, I think that the operating NIM will hang in there somewhere in the range of where we were at in the third quarter and where we're at at the end of the first quarter. It would be a pretty reasonable assumption.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [5]

--------------------------------------------------------------------------------

Great, thanks for that color. And then naturally, we've seen some health care hiccups, I guess, as you roll in Pacific Continental's books. You guys have some -- your own type of exposure. I guess, compare and contrast maybe what you have in the broad scope of health care. It's a little different. And maybe your comfort level with the credit quality within that segment.

--------------------------------------------------------------------------------

Hadley S. Robbins, Columbia Banking System, Inc. - Interim CEO, COO, EVP, Interim CEO of Columbia State Bank, COO of Columbia Bank and EVP of Columbia Bank [6]

--------------------------------------------------------------------------------

Well, experience, credit quality-wise, in the health care segment has been good. And we do have similar program in our footprint for dental and related medical clinics. And frankly, we're competing many times for the same opportunities, and I don't see much of a change in the approach with regard to that segment. And my understanding of the portfolio of Pacific Continental is that they've managed their credit risk well on the footprint side of it. They have a national dental program primarily. That's different than ours. And we have evaluated that, and we'll continue that portion of their business line, and it has performed well.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [7]

--------------------------------------------------------------------------------

But to the degree that you've seen others strain one-offs, you still feel pretty good about the health care group as a whole?

--------------------------------------------------------------------------------

Hadley S. Robbins, Columbia Banking System, Inc. - Interim CEO, COO, EVP, Interim CEO of Columbia State Bank, COO of Columbia Bank and EVP of Columbia Bank [8]

--------------------------------------------------------------------------------

We do.

--------------------------------------------------------------------------------

Jeffrey Allen Rulis, D.A. Davidson & Co., Research Division - SVP and Senior Research Analyst [9]

--------------------------------------------------------------------------------

Okay. Maybe one, just last one. The construction book and runoff was substantial, I guess. Did the poor weather in the Northwest affect that more than you expected? Maybe comments on the runoff there?

--------------------------------------------------------------------------------

Hadley S. Robbins, Columbia Banking System, Inc. - Interim CEO, COO, EVP, Interim CEO of Columbia State Bank, COO of Columbia Bank and EVP of Columbia Bank [10]

--------------------------------------------------------------------------------

Well, some of the runoff went into the term portfolio, so not all of it was runoff that left the bank. But the weather was a factor, particularly January and parts of February where construction was halted. But feel as though we've got a fair amount of commitments that have yet been undrawn that will benefit us in future quarters, so we've managed the activity there and feel that we've got the type of loans on our books that we want that will continue to draw into the future.

--------------------------------------------------------------------------------

Andrew L. McDonald, Columbia Banking System, Inc. - Chief Credit Officer, EVP, Chief Credit Officer of Columbia Bank and EVP of Columbia Bank [11]

--------------------------------------------------------------------------------

Just to give you a little more color. We had about $46 million move out of the construction book and into the CRE perm book.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

And your next question comes from the line of Matthew Clark.

--------------------------------------------------------------------------------

Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [13]

--------------------------------------------------------------------------------

I may have missed it in your prepared comments, Hadley, but the coupon rate on the portfolio and then again on new production, just to make sure I have it.

--------------------------------------------------------------------------------

Hadley S. Robbins, Columbia Banking System, Inc. - Interim CEO, COO, EVP, Interim CEO of Columbia State Bank, COO of Columbia Bank and EVP of Columbia Bank [14]

--------------------------------------------------------------------------------

Okay. I think it's -- let me get my glasses here. It's 4.42% for the coupon rate for the portfolio, and new production was 4.56%.

--------------------------------------------------------------------------------

Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [15]

--------------------------------------------------------------------------------

Got it. Okay. And then on the expense side, a lot of moving parts. It sounds like $66 million or so is a good run rate to use in the upcoming quarter before PCBK closes. Is that fair?

--------------------------------------------------------------------------------

Clint E. Stein, Columbia Banking System, Inc. - CFO, EVP, CFO of Columbia Bank and EVP of Columbia Bank [16]

--------------------------------------------------------------------------------

I think that's reasonable, Matt. We know the things that are seasonal, and the one-time, we back those out. There's always timing differences in terms of things or professional services and advertising and different things, but I think that, that would be reasonable assumption.

--------------------------------------------------------------------------------

Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [17]

--------------------------------------------------------------------------------

Okay. And then, Andy, on the negative migration that you saw in the quarter, assuming you're talking about an increase in criticized classified, maybe could you just quantify, I guess, what migrated and can you hone in on the portfolio or the piece of the ag book that you're focused on?

--------------------------------------------------------------------------------

Andrew L. McDonald, Columbia Banking System, Inc. - Chief Credit Officer, EVP, Chief Credit Officer of Columbia Bank and EVP of Columbia Bank [18]

--------------------------------------------------------------------------------

Yes. So you had quite a bit of migration in the ag book, and it was centered in just a few of the commodities. Some of them I talked about. Wheat, for example, and potatoes are a couple of the commodities in our book that are not performing very well. Offsetting that, you got hops, like everyone's drinking lots of beer, so that's good. Maybe it's because they're so depressed about wheat and potatoes. I'm not sure. But -- so for the quarter, we had negative migration into the classified category of around $45 million, and roughly $30 million of that was ag-related.

--------------------------------------------------------------------------------

Matthew Timothy Clark, Piper Jaffray Companies, Research Division - Principal and Senior Research Analyst [19]

--------------------------------------------------------------------------------

Okay. And then, just what went the other way? Or how much went the other way?

--------------------------------------------------------------------------------

Andrew L. McDonald, Columbia Banking System, Inc. - Chief Credit Officer, EVP, Chief Credit Officer of Columbia Bank and EVP of Columbia Bank [20]

--------------------------------------------------------------------------------

It was really spread out across a lot of different stuff. It wasn't really anything systemic or particular to any one part of the economy, it was just a couple of companies that made some poor decisions and their strategies aren't working, but not specific to any industry or segment.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

And your next question comes from the line of Jon Arfstrom.

--------------------------------------------------------------------------------

Jon G. Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [22]

--------------------------------------------------------------------------------

Question for you on some of the loan demand comments, Hadley, you made earlier. You talked about it being a little bit light, and I think that's pretty consistent with everyone else. But does the spring, so far, look like a typical spring rebound for you? Or is it a little bit different this year?

--------------------------------------------------------------------------------

Hadley S. Robbins, Columbia Banking System, Inc. - Interim CEO, COO, EVP, Interim CEO of Columbia State Bank, COO of Columbia Bank and EVP of Columbia Bank [23]

--------------------------------------------------------------------------------

I think it's a little bit different this year. It seems like building our pipeline is a bit slower to tick up. We are seeing activity now, and I'm hopeful that it gets us more in line with what we would feel comfortable with. It's not bad, and I don't want to give you that impression. It's just not consistent with what our plans were at this point. Some of it relates to -- the weather was a factor early in the quarter. People just weren't moving business activities forward with some of the weather that we had. And in particular, in ag, were late getting crops in the ground by at least 3 weeks, and so that impacts line utilization and some of the other things that we look to. But I remain hopeful that the momentum will move, and we'll be positioned to generate the loan growth that you've seen in the past.

--------------------------------------------------------------------------------

Jon G. Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [24]

--------------------------------------------------------------------------------

Okay. Okay. That's helpful. Andy, just for you, a quick one on ag. You and other banks have had this kind of exposure, been fighting it for years. But any surprises that you've seen or any of the negative migration that you've seen is basically something that you'd expected, if that makes sense?

--------------------------------------------------------------------------------

Andrew L. McDonald, Columbia Banking System, Inc. - Chief Credit Officer, EVP, Chief Credit Officer of Columbia Bank and EVP of Columbia Bank [25]

--------------------------------------------------------------------------------

Yes, no, I wouldn't say there's any surprises. These things go year-by-year, season-by-season. And so we've seen the portfolio migrate through the risk-rating categories downward. The first quarter is the opportunity where we really get to see how the crop year ended, what was the yield, we can take a look at prices, and we can see whether we're looking at a farmer who is going to be able to retire his line of credit or if there was going to be a carry. And so the first quarter for ag in a down cycle was going to be one where migration is going to work against you. And then alternatively, when the commodity prices rebound, you'll probably see the first quarter be one where a lot of migration works for you.

--------------------------------------------------------------------------------

Jon G. Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [26]

--------------------------------------------------------------------------------

Okay. Okay. That helps. And then, Clint, just a quick one for you. It's probably in the filings somewhere. But do you happen to know how much of your loan book reprices with prime or LIBOR?

--------------------------------------------------------------------------------

Clint E. Stein, Columbia Banking System, Inc. - CFO, EVP, CFO of Columbia Bank and EVP of Columbia Bank [27]

--------------------------------------------------------------------------------

Yes, I've got that. We have 19% reprices with prime and 20% with LIBOR.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

And your next question comes from the line of Jackie Bohlen.

--------------------------------------------------------------------------------

Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [29]

--------------------------------------------------------------------------------

Clint, kind of a housekeeping question for you. The M&A expenses in the quarter, the $1.4 million, was that all in professional fees? Or was it spread somewhere else as well?

--------------------------------------------------------------------------------

Clint E. Stein, Columbia Banking System, Inc. - CFO, EVP, CFO of Columbia Bank and EVP of Columbia Bank [30]

--------------------------------------------------------------------------------

No, it was virtually all in professional fees. I think there was a total of $7,000 in 2 other line items, so it's pretty much all centered just in the professional fee category.

--------------------------------------------------------------------------------

Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [31]

--------------------------------------------------------------------------------

Okay. And does that get a normal tax treatment? Or is it a little bit different?

--------------------------------------------------------------------------------

Clint E. Stein, Columbia Banking System, Inc. - CFO, EVP, CFO of Columbia Bank and EVP of Columbia Bank [32]

--------------------------------------------------------------------------------

It's normal.

--------------------------------------------------------------------------------

Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [33]

--------------------------------------------------------------------------------

Okay. And then just given the June-July close date and the September conversion, can you give us an update on how you're thinking about cost savings and when you might expect to realize those?

--------------------------------------------------------------------------------

Clint E. Stein, Columbia Banking System, Inc. - CFO, EVP, CFO of Columbia Bank and EVP of Columbia Bank [34]

--------------------------------------------------------------------------------

Yes, it's consistent with our prior transactions, where usually once we get -- there's some initial cost savings shortly after close but really not much until we get to about 30 days to 60 days beyond the conversion. So if our timeline plays out the way we expect, we would be looking at really the fourth quarter having a good portion of those cost saves in place. There will be some that will occur later through the rest of the integration process, so it'll spill into 2018, early 2018. But the vast majority of them, we would expect would be late third quarter, early fourth quarter.

--------------------------------------------------------------------------------

Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [35]

--------------------------------------------------------------------------------

Okay. So a fairly clean 1Q, and most likely, a very clean 2Q?

--------------------------------------------------------------------------------

Clint E. Stein, Columbia Banking System, Inc. - CFO, EVP, CFO of Columbia Bank and EVP of Columbia Bank [36]

--------------------------------------------------------------------------------

I think that's a fair assumption.

--------------------------------------------------------------------------------

Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [37]

--------------------------------------------------------------------------------

Okay. And then just one last one. Loan revenue was particularly higher this quarter. Was there anything unusual there?

--------------------------------------------------------------------------------

Clint E. Stein, Columbia Banking System, Inc. - CFO, EVP, CFO of Columbia Bank and EVP of Columbia Bank [38]

--------------------------------------------------------------------------------

I'm sorry, I didn't quite hear the last part of your question?

--------------------------------------------------------------------------------

Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [39]

--------------------------------------------------------------------------------

Loan revenue was a little bit higher in the quarter versus some of the prior quarters. Was there anything unusual in the line item?

--------------------------------------------------------------------------------

Clint E. Stein, Columbia Banking System, Inc. - CFO, EVP, CFO of Columbia Bank and EVP of Columbia Bank [40]

--------------------------------------------------------------------------------

Yes, we had a little higher swap income, and we had some -- we had a couple of prepayment fees that came through that line item, so I think that's probably what you're seeing.

--------------------------------------------------------------------------------

Jacquelynne Chimera Bohlen, Keefe, Bruyette, & Woods, Inc., Research Division - MD, Equity Research [41]

--------------------------------------------------------------------------------

Okay. So that's likely to turn back down next quarter?

--------------------------------------------------------------------------------

Clint E. Stein, Columbia Banking System, Inc. - CFO, EVP, CFO of Columbia Bank and EVP of Columbia Bank [42]

--------------------------------------------------------------------------------

I think so, yes.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

And your next question comes from the line of Aaron Deer.

--------------------------------------------------------------------------------

Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [44]

--------------------------------------------------------------------------------

I think most of my questions have been addressed. Maybe just to circle back on a comment you made, Clint, in kind of your discussion surrounding the margin. It sounded like you had maybe expressed some concerns over the -- how market pricing for deposits could affect the margin going forward. But just looking at what -- I mean, you guys have a fantastic deposit base and funding base. It just seems to me that you have a pretty long runway in terms of being able to fund your loan production without having to pay up on the deposit side. Is that -- what -- how does that -- is deposit concern legitimate? Or is that just kind of your thinking about where the market is at this point?

--------------------------------------------------------------------------------

Clint E. Stein, Columbia Banking System, Inc. - CFO, EVP, CFO of Columbia Bank and EVP of Columbia Bank [45]

--------------------------------------------------------------------------------

No. I appreciate your comments about the strength of our deposit base. I mean, it is something that we work very hard at. And our bankers have been working for many years on building relationships, and I think that translates into the composition as well as the cost of our deposits.

So my concerns aren't necessarily -- I do agree, we are in a very favorable position relative to most. Before, we'd have to pay up for deposits. It's -- I think, I guess, where my concern is or where, I guess, I'm cautiously optimistic, is a good way to put it, around the margin and the impact of deposits is that at 4 basis points, there's really no place for our cost to go but up. So at some point, we'll end up having additional interest expense.

And then in my earlier comments, I guess, relative to the margin in the shorter term and the impact to deposits, it's really the amount of growth. If deposits outpace loan growth and we reinvest those in the investment portfolio at high 2s, low 3s, that'll impact the margin but it'll be a positive benefit to net interest income.

--------------------------------------------------------------------------------

Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [46]

--------------------------------------------------------------------------------

Sure, okay. That's helpful discussion; I appreciate it. Thank you for taking my question.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

And those are all the questions that we have in queue.

--------------------------------------------------------------------------------

Hadley S. Robbins, Columbia Banking System, Inc. - Interim CEO, COO, EVP, Interim CEO of Columbia State Bank, COO of Columbia Bank and EVP of Columbia Bank [48]

--------------------------------------------------------------------------------

Well, that concludes our call for the day. Thank you, everyone. Bye-bye.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

And this concludes today's conference call. You may now disconnect your lines.