Columbia Banking System, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Columbia Banking System's third quarter 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. If you are on the telephone and should require assistance during the conference, please press star zero. 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.

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 with release 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, that 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 could 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 Segrist, 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, investors, and a broad spectrum of other stakeholders have expressed strong support and appreciate the thoughtful continuity of leadership. Clint's 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 is Greg Segrist, our Chief Financial Officer, who will provide details about our earnings performance. Clint Stein, our Chief Operating Officer and incoming CEO, will review our production activity and highlight the status of some of our digital investments. Andy McDonald, our Chief Credit Officer, 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.

Thank you, Hadley. Third quarter earnings of $50.7 million and EPS of 70 cents per diluted share was the second-best quarter in our history after the second quarter of 2019. As you know, We've 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 three 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 utilizing a zero-cost collar. Since 2017, fixed rate loans have increased from 38% to 47% of the portfolio, and 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 a corresponding increase in the securities portfolio. The decision to use public funds this quarter is in line with our contingency funding plan and 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 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 you factor that in, the remaining decline in the third quarter operating NIM of nine 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 wholesale in nature, our cost of deposits was unchanged. Non-interest income was $28 million per quarter, which was about $2.4 million on a linked quarter basis, and up $7 million compared to the third quarter of 2018. While each quarter benefited from one-time items, We are seeing positive trends in loan, card, and financial services revenues as we continue to focus on generating non-interest 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 non-interest expense, excluding digital, to continue in the mid-80s range. The year-to-date impact for our digital initiatives was $5.9 million. We anticipate a full-year impact of $9 to $10 million. As we go on through the first year of the digital journey, we have focused on foundational projects that create capacity in the front and back offices and we're on schedule to meet the three-year strategic roadmap laid out a year ago. We expect a similar level of digital investment in 2020 with a full-year impact in the $8 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 prior calls, we have a strong capital position and will continue to balance buybacks with special dividends and strategic opportunities. Lastly, The team has been working hard on the implementation of the new Current Expected Credit Loss, or CECL, accounting standard. Based on our current portfolio and forecasted macroeconomic conditions, we estimated day one 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 five-quarter look back we performed were forecasted macroeconomic variables contributing to quarter-on-quarter variations. No material impact to our capital levels is anticipated. Work 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.