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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's Fourth Quarter and Full Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session through both the telephone and web. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the call over to your host, Clint Stein, President and Chief Executive Officer of Columbia Banking System.
Thank you, Mike. Good morning, everyone. Thank you for joining us on today's call as we review our fourth quarter and full year 2019 results, which we released before the market opened this morning. The earnings release and the supplemental slide presentation are available at columbiabank.com.
Due to the hard work and dedication of our talented bankers, 2019 was our best year ever. We achieved record loan production, while maintaining our disciplines that have produced industry-leading credit quality. All of these factors combined generated record annual earnings exceeding the prior year high set in 2018 by 12%. The tireless efforts of all of our team members, who continually collaborate to do the right thing for our clients and the communities we serve are evident in these results.
Our leadership transition went very smooth. Our long-standing approach to developing bench strength through ready now succession planning provided the blueprint for a seamless rotation of leadership assignments. Our recent announcements have resulted in some new names for you, but these are all leaders with a long track record of delivering exceptional performance.
Our current executive team including the recent additions have an average tenure with Columbia of roughly nine years. I want to take this opportunity to reinforce our commitment to driving long-term value for our shareholders, employees and clients.
The two new executive leadership additions were done in support of our commitment to the seamless integration of technology to drive efficiencies and increased client and employee satisfaction; David Moore Devine and Eric Eid are both seasoned professionals who have been an integral part of Columbia's success over the past decade. I'm confident that their talent will support our future growth and enhance franchise value for many years to come.
On the call with me today are Greg Sigrist, our Chief Financial Officer who will provide details about our earnings performance; Chris Merrywell, our Chief Operating Officer who will review our production activity and highlight the status of some of the initiatives we've been working on; and Andy McDonald, our Chief Credit Officer, who will provide some commentary on credit performance. Following our prepared remarks, we'll be happy to answer your questions.
Let me remind you that, we may make forward-looking statements during the call. For further information on forward-looking comments, please refer to our earnings release documents, our website, or our SEC filings.
At this point, I would like to turn the call over to Greg to review our financial performance.
Thank you, Clint. We achieved record earnings of $194.5 million and EPS of $2.68 in 2019, reflecting strong loan and deposit production a temperate credit environment and a focus on driving net interest income.
Fourth quarter earnings of $46.1 million and EPS of $0.64 per diluted share was our best fourth quarter ever and amongst the strongest in our history. Despite the interest rate environment, net interest income was up nearly 2% in the quarter to $124.8 million reflecting the continued benefit of loan growth and our proactive efforts to mitigate exposure to falling rates.
Operating NIM was down 3 basis points from the linked quarter with key drivers being lower loan yields partially offset by lower funding costs. Total deposits ended the year at nearly $10.7 billion down approximately $171 million from the prior quarter.
We did have a planned outflow of public funds of approximately $300 million in the quarter. As we have said previously public funds are more often akin to wholesale funding and will be used as an alternative funding source when economically beneficial to do so.
Non-interest income of $21.8 million was down from the prior quarter largely due to the $5.9 million gain on sale of owned real estate during the third quarter and was up $1.4 million compared to the fourth quarter of 2018. We have continued to make progress in generating non-interest income, especially, in loan, card and financial services revenues.
Our expense run rate remained stable with fourth quarter non-interest expense of $87 million essentially flat to the third quarter. Our core non-interest expense ratio was 2.53% for the quarter as compared to 2.69% in the prior year quarter. For the full year this ratio was 2.59% as compared to 2.68% for the prior year.
The full year 2019 expense impact of our digital initiatives was $6.9 million including $1 million in the fourth quarter. Overall, we have had success on negotiating favorable contract pricing that have been able to capitalize more cost than expected. Our effective tax rate for the full year was 19.5%, which is within our target range of 19% to 20%.
In line with our comments on the last earnings call, we are expecting the day one impact of adopting CECL to be fairly muted. Additional details will be available when we file our 10-K.
At this point, I'd like to turn the call over to Chris.
Thank you, Greg, and good morning, everyone. Fourth quarter's record loan production of $427 million exceeded the previous record set in the third quarter of 2018 and propelled us to a new annual record of $1.6 billion surpassing the record set last year by $142 million.
For the past three years, we have focused on increasing our production capacity. These efforts are directly correlated to the record results we announced. During the fourth quarter, we experienced the expected seasonal reduction in line utilization, but our bankers' success on the production front offset this decline.
Our loan pipeline remains strong and we are confident that we can maintain this level of production while adhering to our credit discipline. Our deposit base is very stable with the year end mix at 59% business and 41% consumer, which is consistent with our historical levels.
Our cost of deposits continues to be lower than our peers reflecting an even split between non-interest-bearing and interest-bearing deposits. We do expect our typical deposit seasonality in the first quarter as clients draw down cash balances to pay down credit and other expenses.
Term loans comprised 72% of the production whereas lines were 28% of the total. The quarterly production mix was 60% fixed, 34% floating, 6% variable. The overall portfolio is now 48% fixed, 34% floating and 18% variable.
New loan production throughout the quarter was booked at an average tax adjusted coupon rate of 4.36%, which is lower than the overall portfolio rate of 4.69%. The portfolio rate declined 13 basis points during the quarter. During the quarter, commercial and multifamily real estate production was 46% or $197 million of total production. And C&I was 41% or $177 million of the total.
Commercial and multifamily real estate loan totals were up $208 million during the quarter, driven by increases in office, warehouse, health care and multi-family sectors. Approximately $100 million of the increase was offset by a decrease in commercial real estate construction balances as loans moved to permanent status. C&I loans were down $105 million, driven by seasonal activity in public administration, agriculture and manufacturing sectors.
During the quarter, we completed the consolidation of a branch bringing the total to four branches in our Puget Sound and Oregon markets for the year. We believe our retail delivery strategy will continue to be a blend of our physical and digital presence.
Our recently announced Executive Vice President and Director of Retail Banking and Digital Integration, Nicole Sherman is responsible for blending both. We believe she is uniquely positioned to do this based on her 25 years of banking experience including the rollout of Columbia's neighbor hub branch concept. We will continue to actively look at markets across our footprint to access where we want to better position our branch network.
Digital is one piece of our expansion and we will continue the journey from a community banking perspective. We expect improvements in our peer-to-peer money transfer capabilities, online deposit account opening and our small business lending capabilities to go online later this year.
Now I will turn the call over to Andy to review our credit performance.
Thanks, Chris. In summary, credit quality remained very stable in the fourth quarter. NPAs total assets were essentially unchanged as was past dues and problem loans. Net charge-offs for the quarter were minimal at one basis point and for the year they were only three basis points.
Our fourth quarter provision for loan and lease losses was $1.6 million including $2.3 million for the originated portfolio offset by a release of $700,000 for the acquired portfolios. The provision in the originated portfolio was primarily driven by loan growth of $103 million along with a modest amount of negative migration, which is not unexpected at this time of year due to the seasonal nature of some of our customers.
For the year, the provision for loan and lease losses was $3.5 million, which included $5.7 million for the originated portfolio in alignment with our record loan production and was offset by a recapture of $2.2 million in the acquired portfolios. Again, loan production was the primary driver as the originated portfolio grew $796 million for the year. Offsetting this growth was contraction in the acquired portfolios of $444 million, which allowed for the releases. As of December 31, 2019, our allowance to total loans increased by two basis points during the quarter to 96 basis points of total loans, but was down three basis points year-over-year.
As always, we'd like to remind folks that this ratio is impacted by our acquisitions and the associated loans that were recorded at fair value. Embedded in those valuations is approximately $21 million of net discount. For which approximately $13 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 Clint.
Thanks, Andy. Before we wrap up I want to take a moment to thank Hadley Robbins for his service, guidance and friendship. It has been my personal privilege to work with him. And we are a stronger company because of his leadership impact.
All of us wish Hadley and Gayle a long and prosperous retirement. Along with our financial results we announced our regular quarterly dividend of $0.28. We also declared a special dividend of $0.22 which constitutes a payout ratio of 78% for the quarter.
This quarter's dividend will be paid on February 2019 to shareholders of record, as of the close of business, on February 5. This concludes our prepared comments. Chris, Andy, Greg and I are happy to answer your questions.
Mike, now we will open the call for questions.
[Operator Instructions] Your first question comes from [indiscernible]
Hi. Good morning guys. How you doing?
Good. Good morning, Luke.
Just a quick question, first on, just capital deployment, was the switch to the special dividend this quarter against the repurchases in the previous couple of quarters? Is that more price dependent than anything else?
Yes. With the upward movement in our stock price it was to a point where we felt like from a capital management perspective, reinstituting the special dividend for this quarter made more sense than repurchases.
Okay. That's helpful. Thanks. And then just kind of wanted to move into, I think, I have in my notes here that you guys were beginning to offer online account opening in the first half of this year.
Do you mind just giving an update as to how that's tracking? And then, just a follow-up on that is just the traction on the commercial online platform.
On the consumer front, the online account opening is projected around the second quarter first half of this year. As far as the commercial transformation that was completed last year I believe September-ish. And we moved all of our commercial clients to the new platform and it's performing very well.
Okay. That's helpful. And then just lastly, I think, you guys have historically said that given the investment in the digital spend over the past year. And the kind of relinquishing of a lot of those projects you have increased capacity just -- and so just wanted to see if you guys were continuing the kind of to say that, you were going to move downstream on M&A given the excess capacity for ability to integrate and stuff like that. I just wanted to see how M&A conversations were going?
Yeah. The conversations kind of ebb and flow, and anything that's percolating out there, we generally have a view into, we haven't changed our stance or thought process around, our ability to move downstream on M&A with the conclusion of most of our larger platform replacements and additions. So that's still very much our thought process. And it's just a matter of – with M&A it's – it takes – a lot of it is just timing dependent.
But we're very active in looking at who would be a good potential partner for us and both from a business mix point of view as well as culturally. And we continue to stay very busy just evaluating what the population or the pool of potential merger candidates looks like.
Okay. That’s helpful. Thank you for taking my question. I’ll step back.
Your next question comes from Jeff Rulis. Your line is open.
This is actually Levi Posen [ph] on for Jeff Rulis this morning.
Good morning, Levi.
Thank you. Good morning. I just wanted to ask a little bit about expenses and kind of strategy there? You mentioned that the digital investment spend came out to be $6.9 million in 2019. I was just curious kind of where we're at overall in some of those transitions to the digital platform kind of looking into 2020 are we expecting more of that less about the same kind of what does that look like?
I assume you're referring at from an expense perspective. I think in 2019, we completed roughly 30 projects. So I think we've always characterized that as being midstream, it's a three year road map, I think as we've talked about and we've always said I think that the majority of the spend would come in 2019 and 2020. And then it's really the operational efficiencies around the edges and just continued development beyond that.
So I would characterize it as being midstream right now. On your knock-on question maybe, how much were we able to capitalize in 2019 above and beyond the $6.9 million that directly hit P&L? And the answer is to that is $2.4 million has been deferred and/or put into depreciation through the end of the year. So the total spend in 2019 was $9.5 million.
Okay, great. And then kind of staying to the strategy topic. Are you guys talking about any priority shifts in strategy just with the change in management team coming around the same time that rates seem to quiet down?
No. The – my comment during our prepared remarks about the average tenure of the folks on our executive committee being roughly nine years. We've all been very much a part of setting the strategy and the path that we've been on and executing on that. And we've always bought into it, believe in it. So there's no hard right turns in terms of strategic focus.
We'll obviously continue to evolve and some of the changes on the – or additions to the executive team are an example of that evolution. With our digital road map and the investments that we've made and the ones that we continue to see on the horizon, it was very important for us to have that elevated and that was the reason for bringing Eric Eid to the executive committee.
In addition we added a technical focus or a digital focus to our head of retail position. And that's once again focused on making sure that we get higher adoption rates and realize our return on those investments.
And then with what we've done on the client and employee experience side, that's become more important than ever and having somebody that's got a creative mind like David Moore Devine was very important for us to elevate to the executive group as well. And so it's not a change in that strategic focus but it's more just evolving as the industry continues to evolve and our customer base continues to evolve.
Okay great. Thank you. That's really helpful. And then lastly I just wanted to ask a little bit -- one question about the margin. It seems like there was some active management in the second half of 2019 with maybe cost of funds and then also yields on more the security side. What does that look like going forward?
Well, I mean I would just say we're really maintaining the course that we've set and kind of articulated during 2019. In terms of how we're managing our exposure to potential falling rates. So, I don't think there -- into 2020 there's any shift in the thought.
To your point, in terms of the security strategy and kind of the funding associated with that, we've been targeting $800 million related to that strategy. And at year-end we probably -- that probably expands -- so I think -- so the strategy hasn't changed. But I think in 2020, you'll see us come down closer to that target range of $800 million. But otherwise we're -- we feel very fortunate that we have the tools in place when we needed them to manage the exposure to falling rates.
Okay, great. That's all I have. I appreciate it. Step back now.
You're welcome.
Your next question comes from Jon Arfstrom. Your line is open.
Thanks. Good morning guys.
Good morning Jon.
Few things. Just bigger picture on loan production. You guys had a really good quarter relative to what you would normally see this time of the year. And I'm just curious if you could give us an idea if you could point to maybe one or two things that might be different over the last few quarters? Is it taking more market share? Is it existing clients with more activity, or what would you really point to?
Jon I think -- this is Chris. I think it's a combination of many things. And some of the comments we've talked throughout the year of adding teams in certain locations. Those teams came on board. And have produced very well. And when you couple that with our experienced bankers that are out in the market and making calls, they're driving a higher production from that aspect as well.
Other than that I would tell you that it really falls into maintaining the credit discipline and our pricing discipline. So, it's a balancing act but it's really -- it's the talented bankers that we have and the new folks that we brought on that continue that production.
Okay. And just remind me you typically see a little bit of strengthening in Q1 and then more in Q2 is that the right way to think about it?
Well, it's largely weather-dependent.
Okay.
We can see some strengthening towards the end of Q1. So focal date balances, but typically not averages. But it really is weather-dependent on the ag sector and when they can get in the field. So, right now, it's just hard for us to handicap that.
Yes. Okay. And then two follow-ups. One, on the margin, help us understand what you're thinking about in terms of the margin, I wouldn't call it a high-class problem, but I call it a challenge because you have this big low-cost deposit base. But Chris, you also talked about new coupons. Coupons on new production coming down a little bit. Is it fair to think about a little bit more pressure each quarter on the margin here, or Greg, do you feel like you've got enough tools in place where you can manage to some margin stability?
Well, again Jon, we're really focused on managing net interest income versus just really managing the margin to be honest. But I think you've hit the two primary drivers for us. One is the coupon on new production, deposit pricing is important. It's -- we saw some room to go there as part of the program. But I think the other thing that's really out of our control is just the interest rate environment, what happens to the shape of the curve over time. But we feel that again, we're very fortunate to have had the protections in place when we needed them Jon. So I think that that will help us on the NII side, but we're going to stay focused on what we can control which is loan production and our deposit pipelines.
Okay, good. And then, just one follow-up on the digital spend. I appreciate the capitalized number and the total that you shared with us. But is the message -- you said spending is 2019 and '20, is the message that the spend is in the run rate for 2020 and we may see some of this come off in 2021, or is the message that there might be some incremental spending in 2020 relative to 2019?
I think we're still going to see some spend in 2020. The guidance we provided last quarter was a range, a total investment in the $8 million to $10 million range. And my best guess right now is we're probably at the lower end of that investment. And with some ability to capitalize, but probably not at the same level we capitalized in 2020, just throwing out broad concepts here Jon. But I think we -- at some point in 2020, we're headed very quickly approaching the point where digital spend is just part of our run rate. And where that normalizes is still I think a question because, we're always going to want to keep pace with the digital offerings that are kind of evolving and there's obviously ebbs and flows in that in the environment. So it's hard to look out and put an iron curtain number or thought in terms of where we start to normalize and how. But we've always invested in the business. Digital is now part of that investment. And we are -- in 2020, I think going to hit that point where it's just part of the run rate.
Yes, okay. That makes sense. Good year for you guys. Congrats.
Thank you.
[Operator Instructions] Your next question comes from Gordon McGuire. Your line is open.
Good morning.
Good morning, Gordon.
Greg, I wanted to follow-up on an earlier question about the securities portfolio. It looks like end-of-period balances were up close to $400 million. And if I back out the premium amortization, the yields were up a good bit. But based on your earlier answer, it didn't sound like that was part of the security strategy. Did I get that right?
It wasn't really. I mean, I think we had stronger deposit growth when you factor out the public funds, which really translated into more liquidity in the portfolio which is the way I'm thinking about it on a net-net basis.
Okay. And then just thinking about for next quarter, I think deposit growth is a little bit seasonally softer. Would you expect the size of the securities portfolio to come in from what you're seeing at end of period levels?
If, yes. If deposits remain flat to coming down a little bit, I would still expect some of the cash coming off the portfolio just to repay some of the wholesale funding we have out there. But obviously, we're staying focused on maintaining our target on the interest rate strategy as well around $800 million. But I think there's probably some room to come down to that, but I think it will come down a little Gordon, but not a lot.
Okay. Thank you. And then just on the expenses. It looks like there was an FDIC credit this quarter. Do you have what's remaining to be realized and the timing of when that might come through?
It's roughly $1 million left on that credit and we'll be able to tell us – take it when the FDIC tells us we can take it. It's obviously dependent upon their targeted deposit ratio that they're looking at. And if we're fortunate, it will be in the first half of 2020, but its $1 million level. It's down to a pretty de minimis level.
Got it. Clint, you touched on M&A earlier. I just want to get a sense you've talked in the past about Northern California. Just geography wise, is there a preference between in footprint or Northern California or maybe any expansion of geographic focus at this point in time?
Well, in footprint is always easier relative to generating cost saves, understanding the market dynamics, the political environment all of those things that we consider when we look at the various markets. But that doesn't mean that, we'll shy away from Northern California or other markets. There's we've done – for many years, we continually update this. But we've done a pretty broad geographic analysis and identify the opportunities that are out there. And when you look at California, I think it's the world's fifth largest economy. Some of the – most of the Northern California market is very similar to the markets that we're already operating within, but there's the local nuances of local politics and market knowledge. And so we're just spending a lot of time learning about that market. And what we've learned hasn't changed our opinion that we think that there are some opportunities there. But it's more difficult to go into a new market then do something that's already within our existing footprint.
Got it. And then last one Andy. I was wondering, if you could provide some local color on the pause of the Boeing 737 MAX assembly at the Renton factory nearby? What kind of impacts you might see the local economy and whether you see any kind of growth or credit risk as a result of any exposure?
Sure. Well, so far Boeing's been pretty proactive in retaining the existing workforce in the Renton plant and they're deploying them up north to Everett, and then down south here in the Tacoma Frederickson area, as well as trying to get folks to go and relocate to Moses Lake where they have 200, 250 planes parked that need maintenance.
And Boeing understands that the labor pool that they have is pretty unique, and they don't want to lose that because when they want to get back into production, it will want those people to have migrated to other companies, other industries or other geographies.
Nevertheless, as those employees move to Everett, Frederickson and Moses Lake, it will have an impact on the written area. There'll be a domino effect in my opinion on restaurants, dry cleaning, gas stations; those kinds of activities.
We'd estimated that our exposure in and around the Renton plant is roughly $55 million. So for us, it's a modest amount and that would include just by simple addresses what the exposure is and that's both consumer commercial and commercial real estate.
I think that nationally the Boeing situation can impact other communities, in a sense, larger because of what happens to the subcontractors and I referenced the company spirit that laid off 2,000 people. They make fuselage for the 737. Here locally Boeing is trying to retain that employee base. And so that's good for us.
And then with most of the local suppliers, they’ve also created arrangements by which they will either continue to buy parts even though they're not building planes or they will provide financial support.
So we're optimistic that Boeing is doing all the right things to mitigate any big impacts to our economy. But we are monitoring it closely, and we have identified the potential risks to Colombia.
So that $55 million would include any local supplier exposure?
Well, the supplier exposure extends beyond just around the written plan. And if you were to look at our total exposure, it's about $75 million to $80 million.
Got it.
So for example, we have a customer in Eugene, that is a big supplier to Boeing and Eugene is a long way from Renton.
Yeah. Thank you.
There are no further questions at this time. I will turn the call back over to the presenters.
Well, thank you for joining us, and we look forward to talking with you again next quarter. Bye.
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