Columbia Banking System, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Columbia Banking System first quarter 2019 earnings release presentation. 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 the web. Instructions will be given at that time. If you are on the telephone and should require assistance during the conference, please press star 1. As a reminder, the conference is being recorded. I would now like to turn the call over to our host, Hadley Robbins, President and Chief Executive Officer of Columbia Banking System.

Thank you, Natalie. Good morning, everyone, and thank you for joining us on today's call as we review our first quarter 2019 results, which released before the market opened this morning. The earnings released in a supplemental slide presentation are available at ColumbiaBank.com. We had a strong first quarter. As many of you know, we have a seasonal pattern to our performance. First quarters typically are weakest during the year. We're very pleased with our results and see positive momentum building across our footprint. Loan production was a new first quarter record. The mix of our core deposit base remained stable, and deposit costs were well managed. The total cost of deposits was 18 basis points, Thank you for joining us today. Ordinary Dividends, Special Dividends, Share Repurchases, and Investing in Our Business. On the call with me today are Greg Segrist, our Chief Financial Officer, who will provide details about our earnings performance and an overview of our share repurchase plan. Clint Stein, our Chief Operating Officer, who will review our production activity and highlight the status of some of our digital investments. and Annie McDonald, our Chief Credit Officer, who will review our credit quality information. 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 return the call to Greg to talk about our financial performance.

Thank you, Hadley, and good morning, everyone. First quarter earnings of $45.9 million and EPS of $0.63 per diluted share was an increase from the fourth quarter 2018 and an increase of $0.08 compared to the first quarter 2018. First quarter net income was the second best quarterly earnings performance in our history. During the quarter, total loans increased by 6% on an annualized basis. Much of the growth occurred near the end of the first quarter, so we will expect to see a positive impact to earnings in subsequent quarters. The operating net interest margin of 4.33% was essentially flat to the prior quarter, as an uptick in asset yields from the late December rate increase was offset by a modest increase in deposit rates and a seasonal shift in funding. In previous quarters, we have discussed our asset sensitivity and our long-term approach to reducing our exposure to falling rates. We feel our interest rate strategy is prudent and better positions us to mitigate an eventual decline in rates. The trade-off is a modest NIM headwind, but overall has improved bottom-line performance and protects earnings should rates decline. After removing the effects of acquisition costs that impacted 2018 results, non-interest expense decreased $1.8 million on a linked quarter basis due in large part to items subject to timing differences. Compensation and employee benefit expense was up mostly due to the discretionary 401 employer contribution and increased employer payroll taxes as caps reset. Excluding acquisition costs of $4.3 million in the first quarter of 2018, non-interest expense is up $3 million or roughly 3.5% on a year-over-year basis. In the first quarter, we incurred $600,000 of expenses that was directly related to our digital initiatives. As more projects come online in the coming quarters, we will provide you with the appropriate visibility to discern between our operating run rate and the expense impact of our digital investments. We do expect to invest somewhere between $9 million and $12 million in digital initiatives over the balance of 2019, though some of that will be capitalized rather than hitting expenses directly, so it is difficult to tell you the quarterly expense impact in advance. We expect our noninterest expense from ongoing operations to continue in the mid-'80s, we believe we have appropriately balanced the continued investment in our franchise with our longstanding commitment to a disciplined approach to expense management. Increases in our expense base over the past year are directly related to higher production and asset levels. Our effective tax rate was 19% for the first quarter, which was down modestly from the prior quarter and is in the range we would expect for a full year, which is 19% to 20%. As Hadley mentioned, and you may have seen in our 2018 SEC Form 10-K, our board approved the share buyback plan that authorizes the company to repurchase up to 2.9 million shares. We do intend to incorporate share buybacks into our capital strategy when it is advantageous for our shareholders to do so. Our ability to buy back shares when it makes sense would also impact the level of our special dividend going forward. We are very pleased to have this additional capital management tool available to us. At this point, I would like to turn the call over to Clint.